The rapid expansion of the cryptoverse has been fueled, in part, by institutional adoption from some of the most storied traditional financial institutions — from America’s oldest bank, BNY Mellon, to Goldman Sachs, State Street and a myriad of others. In addition, crypto-native businesses have begun to embrace institutional investors, creating a new and growing ecosystem.
Last week, the Wall Street Journal wrote a piece on institutional adoption explaining, "Hedge funds and other professional investors were already trading cryptocurrencies, but many money managers—from mutual-fund giants to pension funds—are increasingly eager to find a way into the crypto markets, executives said. Inflation and rising interest rates have damped expectations for returns on stocks and bonds, making cryptocurrencies more attractive."
The piece highlighted that Wall Street participation could provide stability to these new markets as traditional institutions, “build capabilities to store and trade bitcoin and other digital assets while they await U.S. and state regulatory approval that they say will allow them to go live with those services for institutional clients.”
On April 30, TRM’s Ari Redbord moderated a discussion at London’s Guildhall on institutional adoption of digital assets and the intersection between TradFi and crypto with these exact players:
Michael Demissie, Head of Digital Assets Unit and Advanced Solutions Group, BNY Mellon
Swen Werner, Global Head of Digital Custody and Payments, Head of EMEA and APAC, State Street Digital
Frederic Brown, Head of Product, EMEA, GSR
Mathew McDermott, Global Head of Digital Assets, Goldman Sachs
Guillaume Chatain, CFA, Head of Institutional Sales EMEA, Coinbase
It was a wide ranging discussion on how traditional financial institutions are engaging with the digital asset space, the forces driving institutional adoption, and the need for clear, global, regulatory frameworks. Here are the key takeaways:
Cryptocurrency businesses are focused on traditional institutions . . .
The fact that native crypto businesses have a head of institutional sales is indicative that crypto businesses are actively engaging with institutional investors. Guillaume Chatain, who holds that position for Coinbase, explained that cryptocurrency businesses like Coinbase are working closely with institutional investors, who are using their prime broker platform to buy, sell, custody and engage with crypto and NFTs. Chatain explained that traditional financial institutions “want to offer crypto services to their clients but use a third party infrastructure, and [Coinbase is] giving them a white label solution for that.”
...and traditional institutions are focused on crypto
While crypto businesses are focused on traditional financial institutions, panelists agreed that clients are driving institutional adoption of crypto and digital assets. Michael Demissie of BNY Mellon explained that the firm views this adoption, “as part of a mega-trend which would follow with traditional assets actually going on this rail and benefiting from the innovative designs that you see. So we stepped in with conviction, starting with actually extending our services to this emerging asset class, but at the same time looking at the underlying technology itself and see how we can actually transform our businesses as well.”
This sentiment was echoed by Matthew McDermott, of Goldman Sachs and Swen Warner of State Street, who stated the situation is evolving quickly: “there's a strong conviction that blockchain technology and digital assets overall will transform the markets...it's not just crypto. It's kind of tokenization of assets. It's stable coins. It's CBDC.”
Culturally, a lot has changed in a few years
Frederic Brown, formerly of Goldman Sachs, highlighted just how fast the space is moving by harkening back to his time at Goldman just a few years ago when there were a few discussions about projects involving Bitcoin, but the management at the time was opposed to the idea. Brown continued, “The view of the management has changed in general,” and talent from the TradFi space is now moving into crypto. “When we interview the candidates coming from investment banking, they want to be close to this new opportunity, and that's actually what we see right now.”
Regulation? Keep it clear
The entire panel agreed that when it comes to regulation, clarity is as important as substance. The panel agreed that one way to move forward is to try to skate to where the puck is headed and behave like digital assets are already in a highly regulated environment.
What’s next for institutional adoption?
So what is next when it comes to digital assets and institutional engagement? Michael Demisse of BNY Mellon focused on removing friction to authentication — an area in which NFTs could play an important role.
When you are building a new financial system things move quickly and it is impossible to know just how things will play out. One thing is certain; traditional financial institutions, together with native crypto businesses, will play an important role in shaping this new ecosystem. Recently, responding to growing demand from clients, LGT Bank, the financial institution owned by the princely House of Liechtenstein and part of the largest family-owned banking group in the world, announced that it will be offering cryptocurrency custody and brokerage services to private clients, starting in Liechtenstein and Switzerland.
About TRM Labs
TRM provides blockchain intelligence to help financial institutions, cryptocurrency businesses, and public agencies detect, investigate, and manage crypto-related fraud and financial crime. TRM's risk management platform includes solutions for transaction monitoring and wallet screening, entity risk scoring - including VASP due diligence - and source and destination of funds tracing. These tools enable a rapidly growing cohort of organizations around the world to safely embrace cryptocurrency-related transactions, products, and partnerships.
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