Does the Collapse of FTX Spell the End of Days for Institutional Interest in Digital Assets?
Dec 23, 2022
The inaugural Hubbis Digital Assets Forum on November 30 arrived in the aftermath of collapse of FTX. A panel of experts focused their attention on what this debacle means for institutional interest in cryptocurrencies and other digital assets, and by implication the knock-on effect for private investors of all types of wealth. Their conclusion was the cryptos and digital assets are beyond the purely experimental and speculative phase, and in need of a more institutional approach to satisfy the needs of originators, intermediaries, wealth managers and investors of all types. The demand might stutter somewhat as asset prices remain weak and in the aftermath of the FTX crisis, but the path ahead is clear – the standards and protocols and indeed regulatory oversight in the mainstream financial world will help improve all those areas in the world of decentralised finance. The result should be a far better and globally scalable digital assets infrastructure.
Founder and CEO
Chief Operating Officer & Managing Partner
Swiss-Asia Financial Services
Director – Digital, Data & Innovation
HSBC Securities Services
APAC Product Lead
State Street Digital
Institutional level custody and security is a must for digital assets of all varieties
A banker explained that his mission is to oversee a digital asset proposition globally for the bank from a securities services perspective. They promote institutional custody and asset servicing to support investor and intermediary participation in digital assets and are shaping their products and services to support clients and their rising involvement in this asset class.
“From my perspective, we look at the infrastructure that enables digital assets, and cryptos are the assets that have proven the viability of the underlying infrastructure, and the efficiencies it brings,” he told delegates. “More importantly, I look at the infrastructure as helping to completely reshape how assets are represented. Digital assets are a much larger phenomenon than simply crypto and what we have seen in the last three, four years is initiation of a significant transformation of how assets are represented and serviced.”
Welcome to the future – a world of digitised custody, wallets, and keys
As to the custody proposition, he noted that financial assets used to be represented by paper certificates stored in vaults, but that was before everything was represented in an electronic register.
“What is happening now with digital assets is we are replacing the construct for the modern world with wallets and private keys,” he observed. “The ecosystem is expanding dramatically fast, as the underlying asset pool that can be digitised runs to hundreds of trillions of dollars. And to achieve that custody must advance significantly. Custodians do not provide custody for anything physical today, such as art, wine, illiquid asset classes, but with digital assets, they can all be stored and custodisable under the wallet and key infrastructure.
Risk and reward - change, evolve, move forward, grasp the opportunities ahead, or potentially risk obsolescence.
The same expert said that means the opportunity for their bank is really tremendous, but the operating model will need to be entirely different. “Which means we are addressing both a threat and a huge opportunity,” he explained.
He said that more and more larger institutions still want to enter the market, but they need the market to be of a certain scale for them to get more involved. At the same time, he noted there is rapidly growing appetite for origination, as digitisation of assets opens the doors to smaller deals than typical for private assets, and also for deals to take place at greater speed.
And as to distribution, there is growing appetite and infrastructure for smaller tickets sold in higher volumes. “Our whole industry is moving from distributing large tickets with low volume to manufacturing products of smaller size at a much larger scale,” he said. “That means infrastructure change, and this is basically the combination we have. Manufacture frequently, distribute at a wide scale but in smaller ticket size. That is where we are going to.”
The reality remains that the digital assets ecosystem and infrastructure are both in their very early stages
Another banker involved closely in custody explained that although 230 years old, they are only as yet learning to walk as far as digital assets are concerned.
“We are looking to provide products and services that will support our traditional client base as well as the native digital clients that we are seeing enter the space,” he reported. “We are looking to potentially provide services in this space. We are already in the fund administration, and we will provide custody just as soon as the regulators allow us to do.”
Digital assets, this specialist reported, span cryptos and potentially any types of digital stablecoins or tokens of all types, including security tokens, or non-fungible tokens, and so forth. “The concept of tokenisation is certainly something that has captured the imagination of the industry, and around which we are building capabilities and infrastructure to bridge that gap between traditional and digital assets,” he explained.
Radical change means major disruption and major institutions need to be realistic about implications and well ahead of the game
“We are looking to radically improve what are historically clunky and inefficient interactions between client users and asset service providers and make it all significantly more streamlined,” this same guest explained. “We see the potential for us to be able to have almost a clean slate, a uniform approach to be able to standardise and digitise assets, and then make them freely available to the end investor. There will be more transparency, more efficiency, less cost, and other advantages.
He added some words to mirror another panellist’s earlier warnings of the combination of threat and reward. “We have already made a presentation to our board that in the next five to 15 years, the entire concept of custody as it is now will evaporate,” he told delegates.
“We will no longer have assets under custody, we will have keys under custody,” he continued. “Accordingly, access to those assets or control of those assets is going to be the way in which we will be measured. Moreover, the idea of net interest income from cash and deposits will also potentially disappear. So, we need to have a defensive play, ensuring that we stay relevant. We need to maximise our capabilities as far as infrastructure and the regulatory know-how that we've developed over time in the markets that we operate in and apply those in a digital way to be able to provide that and continue to provide value to our end clients.”
And all this is coming at the same time as demand rises from investors of all types and from across the wealth spectrum
An asset manager agreed, explaining that they are looking into the applicability of various asset classes for digitisation, including tokenisation of hedge funds, putting those tokens on the blockchains to give access to a broad array of investors.
A speaker summed up some of the comments by remarking that clearly there will be this dramatic transformative impact on the entire financial world, and then the impact and perhaps a complete change in business models, infrastructure, operations and so forth. But the speed of change will be driven by customer demand and also by regulation, she said.
A guest explained that in the earlier days of client interest in cryptos, it was driven largely by pure speculation, the fear of missing out and the media’s reporting on fabulous wealth created overnight out of what appeared to be thin air, as Bitcoin and other cryptos surged to hundreds or thousands of percentage point rises.
Shifting from blinkered speculation to more tempered opportunism, and in need of a more professional ecosystem
“During those times,” he noted, “there was little concern for security but today the whole ecosystem has become more substantial, with banks and other brand name institutions involved, and providing access to digital currencies just like any other established asset class. So now, people are looking at these assets also from a security and safety perspective, and even more so after FTX’s collapse. People are asking about custody, wallets, access, reporting, transfers, and so forth. What people want is an infrastructure that they can trust. Safety is now at the centre of discussions.”
The wealth management community is gradually coming on board, in response to the opportunity and their clients’ needs and expectations
Another guest agreed with this view, noting that the wealth management community had become considerably more focused on these assets in response to the diversification of demand amongst their clients.
“As things have advanced and matured, and as regulation has gradually improved, the wealth managers have increasingly been looking at ways to get involved in the distribution of these assets more efficiently and effectively eradicate some of the intermediaries that have been involved,” he explained. “Looking forward, there is a clear need and expectation to bring more standardisation of approach to these types of assets in the future, which will then result in the margins that we are seeing squeezed over time and redistributed and reallocated back to the actual streamline chain that has been created today.”
The worlds of TradFi and DeFi are drawing closer together at the same time as the universe of digital assets explodes – greater harmonisation of standards, and approaches will benefit all
The closing comments went to a speaker who said her conclusion from the discussion and from her actual experience is definitely that demand for digital assets will rise, even if temporarily slowed by weak prices and the fallout from FTX. She said she foresees continuing closer alignment between mainstream traditional finance and DeFi, bringing the best of both those worlds together for investors to actually generate yields and returns in a much more efficient manner.
The Final Word – FTX a road bump on the digital assets expressway
“There is a virtuous cycle coming about,” this speaker concluded. Yes, people looking at it from slightly different angles but the big takeaway for us is that the FTX collapse, or the ensuing ripples are definitely not an end for institutional interest in the digital asset class. If anything, she indicated this might be more of a new beginning, with more interesting in-depth conversations centred on security, regulations, real use cases, and the evolution of the business models of all types of entity, from corporates, to intermediaries, banks, asset managers, wealth management institutions, and so forth. “I expect a very different type of discussion this time next year,” she said, on closing the panel.