Volatility and the digital transformation: Surviving the cryptowinter
The summer of 2022 was cold for crypto. In fact, conditions were so bleak for the alternative asset class that it lost a third of its value with the largest currency, Bitcoin, dropping from its November 2021 highs of almost $69,000 to just $19,000 by June.
‘Cryptowinter’ has seen the currency in the throes of negative investor sentiment and damaging media coverage.
However, compared to the performance of safe-haven assets since 2020, crypto appears to have fared relatively well.It remains the fourth most popular asset for investors after stocks, mutual funds, and bonds.
Institutional investors still regard digital assets as the future, and they are considered an important diversifier for portfolios. In the last year, large institutional investors have started to accumulate bigger volumes of Bitcoin and Ethereum, both to combat inflation and to deliver a reliable income stream.
Protecting the investors in crypto
While the environment for crypto has been decidedly chilly, regulators continue to warm to more legislation of the sector, which should prompt greater appetite from institutions currently deterred by reputational risks.
Regulatory authorities across all major regions are acting to improve clarity around cryptocurrency and pave the way for responsible market growth.
This June, in the depths of cryptowinter, the Japanese Financial Services Agency (JFSA) released a public consultation proposing a removal of the ban on Japanese trust banks from conducting a cryptoasset safekeeping business. The idea is to leverage trust banks’ experience and risk management resources for cryptoassets, which would strengthen investor protection and promote market development.
Meanwhile, the Hong Kong government introduced pioneering legislation, giving the Securities and Futures Commission of Hong Kong responsibility for virtual asset service providers by issuing them licenses, in a bid to combat money laundering.
At a global level, this July the Financial Stability Board issued a statement on International Regulation and Supervision of Cryptoasset Activities, which called for harmonised regulation of digital assets and the need to manage financial stability risks.
Enhancing the ESG credentials of cryptoassets
Cryptoassets are not always seen as compatible with investors’ environmental, social and governance (ESG) investment strategies. Yet recent developments in the sector suggest the conditions for the G, at least, are improving.
Decentralised Finance (DeFi) platforms are an innovative financial technology that uses distributed ledger technology (DLT) and blockchain to eliminate the need for intermediaries.
The interest in DeFi by institutional investors is increasing and, while the premise suggests lower levels of governance in the absence of intermediaries, DeFi platforms are reinforcing the blockchain community’s commitment to decentralisation by issuing governance tokens to users.
These governance tokens transfer agency, responsibility, and control of platform management from a project’s small group of founders, employees, and insiders to the globally distributed and decentralised community of stakeholders that uses the platform and engages with the wider DeFi ecosystem.
As more participants join, so the governance of these tokens improves and ultimately this innovation improves the freedom and security with which investors can participate in cryptoassets.
Improvements in the technology powering crypto
A volatile summer for cryptocurrency has not stymied technological advances. Indeed, the technology underpinning cryptocurrencies could dramatically alter the way other financial assets are used in investors’ portfolios.
In particular, the transformative potential of blockchain and DLT could see illiquid assets such as infrastructure and private equity become more easily tradable through ‘fractionalisation’.
Effectively, the physical infrastructure or property is broken up into digital tokens – or ‘token shares’ – that represent parts of the underlying asset to be traded much like an equity.
This is an important development since it would open the private markets to retail investors, notably defined contribution pension members, who have long struggled to include illiquid assets in their portfolios.
ETFs and mutual funds also stand to benefit from having their shares and units tokenised, creating a new way for participants to issue, hold and trade assets.
The recent volatility in the digital assets market has given rise to greater innovation and improved oversight.
To know more about the digital transformation, please visit: Digital Digest: Volatility and the Digital Transformation | State Street Corporation
The material presented herein is for informational purposes only. The views expressed herein are subject to change based on market and other conditions and factors. The opinions expressed herein reflect general perspectives and information and are not tailored to specific requirements, circumstances and / or investment philosophies. The information presented herein does not take into account any particular investment objectives, strategies, tax status or investment horizon. It does not constitute investment research or investment, legal, or tax advice and it should not be relied on as such. It should not be considered an offer or solicitation to buy or sell any product, service, investment, security or financial instrument or to pursue any trading or investment strategy. It does not constitute any binding contractual arrangement or commitment of any kind. State Street is not, by virtue of providing the material presented herein or otherwise, undertaking to manage money or act as your fiduciary.
You acknowledge and agree that the material presented herein is not intended to and does not, and shall not, serve as the primary basis for any investment decisions. You should evaluate and assess this material independently in light of those circumstances. We encourage you to consult your tax or financial advisor.
All material, including information from or attributed to State Street, has been obtained from sources believed to be reliable, but its accuracy is not guaranteed and State Street does not assume any responsibility for its accuracy, efficacy or use. Any information provided herein and obtained by State Street from third parties has not been reviewed for accuracy. In addition, forecasts, projections, or other forward-looking statements or information, whether by State Street or third parties, are not guarantees of future results or future performance, are inherently uncertain, are based on assumptions that, at the time, are difficult to predict, and involve a number of risks and uncertainties. Actual outcomes and results may differ materially from what is expressed herein. The information presented herein may or may not produce results beneficial to you. State Street does not undertake and is under no obligation to update or keep current the information or opinions contained in this communication.
To the fullest extent permitted by law, this information is provided “as-is” at your sole risk and neither State Street nor any of its affiliates or third party providers makes any guarantee, representation, or warranty of any kind regarding such information, including, without limitation, any representation that any investment, security or other property is suitable for you or for others or that any materials presented herein will achieve the results intended. State Street and its affiliates and third party providers disclaim any warranty and all liability, whether arising in contract, tort or otherwise, for any losses, liabilities, damages, expenses or costs, either direct, indirect, consequential, special or punitive, arising from or in connection with your access to and / or use of the information herein. Neither State Street nor any of its affiliates or third party providers shall have any liability, monetary or otherwise, to you or any other person or entity in the event the information presented herein produces incorrect, invalid or detrimental results. To learn how State Street looks after your personal data, visit: https://www.statestreet.com/utility/privacy-notice.html. Our Privacy Statement provides important information about how we manage personal information.
No permission is granted to reprint, sell, copy, distribute, or modify any material herein, in any form or by any means without the prior written consent of State Street.