The Next Wave of Institutional Digital Asset Adoption



Skeptics attempt to portray the FTX debacle as the end of crypto’s appeal and adoption. Nothing could be further from the truth. On the contrary, it is a clear sign that in 2023 and beyond, we will see greater reliance on decentralized infrastructure and better regulation of centralized finance (CeFi). It’s also a call for better digital asset solutions in general.

As many have pointed out, this was a failure in CeFi, not DeFi. A simple look at DeFiLlama shows that decentralized exchange (DEX) volumes have increased by nearly 70% despite market sentiment. So, on the one hand, there is a part of the market that doubles down on the decentralization philosophy of crypto.

Sean Lee is the co-founder of Odsy Network and is the executive director of the Switzerland-based Odsy Foundation. This article is part of Crypto 2023.

But there is also a way that crypto’s influence will continue to grow in traditional finance despite the controversy. A 2022 survey by The Economist found that 85% of investors “agree that there is a need for open source digital currencies as diversifiers in a portfolio or cash account.” However, that same survey found that lack of regulation was the most cited barrier to digital asset adoption by institutional investors and corporate treasuries.

(Revealingly, “lack of regulation” was tied to “financial market structures” as a barrier, which will also be discussed.)

In 2023, a side effect of the FTX and Alameda Research debacle will be a shift towards more traditional regulated entities as entry points into digital asset markets. This will be especially true for users who still prefer to use simpler and more familiar service providers rather than CeFi. Why go with intermediary services? Go fully DeFi or fully traditional.

Read more: 23 blockchain predictions for 2023 | Opinion

After market recalibration and regulations catch up, these are the companies that will be ready to meet the growing demand for digital assets among institutions, family offices and even many retail customers. It’s easier to imagine a family office going to a reputable, regulated company like Fidelity to diversify into crypto than directly into Uniswap or a new competitor CeFi that may or may not operate the same way as FTX. .

Is TradFi prepared?

Now the important question is: are these companies ready for this? The truth is that there are significant challenges facing them right now. Although federally chartered banks in the United States have been given the green light for crypto since 2020, most companies have been reluctant to offer digital asset products other than some exposure to BTC or ETH in limited capacities. .

Custody and regulation

The first challenge they face comes from the responsibilities created by taking care of digital assets. There are potential liabilities that companies need to consider when offering crypto due to risk management policies and consumer protection laws.

There is also additional complexity in that different regulations may need to be considered for different digital assets. As the global regulatory landscape continues to evolve, when a company retains custody of an asset, some of these matters fall under its responsibility. For example, determining whether a particular asset is considered a security or a commodity, and how it may be treated differently in other jurisdictions, becomes relevant to how it should be managed by the business.

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Then there are a number of infrastructure issues that need to be addressed before companies can effectively expand their product offerings into digital asset markets. Underlying them is the fact that crypto is an incredibly fragmented space with assets managed across different blockchain networks, and has minimal crossover with current financial market structures (as seen in the aforementioned survey by The economist).

A company looking to offer digital asset products struggles to create products that can rely on a consolidated view of the crypto space. They should set up and run dedicated systems for each blockchain network and all the different cryptographic or tokenized assets running on it.

In fact, crypto services on the ramp often have entire teams dedicated to addressing compliance and technical development issues related to adding new assets to their offering. It’s easy to see how solving these complex problems on their own is not a priority for traditional financial firms despite the growing demand for digital assets.

All of these challenges point to a larger problem that can be summarized as follows: cryptographic and Web3 infrastructures are evolving rapidly, but still ignore rules-based access control as a primary starting point.

where they are now

Currently, traditional financial firms looking to offer digital assets have limited options in terms of implementing compliant custody and infrastructure. They either rely on siled proprietary software or turnkey solutions that offer the same product to all other competitors and eliminate any competitive advantage that companies might develop.

These approaches run counter to an overall move to an open-source software infrastructure for institutions that predates Web3 and offers known advantages in security, customization, and community innovation without vendor lock-in. Moreover, they leave little room for the development of financial products that meet customer needs such as user experience, access rights, self-custody, risk controls or rules-based frameworks and safeguards for local regulations.

where they should be

What would be a better option that would allow these companies to meet customer needs? A decentralized and open-source access control layer for crypto and Web3.

This layer would take the form of a single network dedicated to decentralized dynamic wallets (dWallets) that are programmable, transferable and capable of signing transactions on different blockchains. This new open source infrastructure for wallets could take on the custodial burden and offload much of the complexity of building infrastructure for traditional businesses.

Read more: 2023 should be the year of on-chain user security | Opinion

As a result, financial services firms could simply focus on expanding their digital asset offerings as they see fit, in an almost plug-and-play fashion. As long as their services are built on top of this layer, they can easily introduce crypto into existing financial products and even develop their own digital asset products. All of this happens while the custody remains with the customer and all the necessary rules for the product are mapped into the existing risk and compliance policies set by the companies but enforced by the decentralized network.

Such a layer would allow companies to meet customer needs by offering services such as:

  • Noncustodial products that are decoupled from associated potential liabilities and reduce regulatory burden
  • Easier expansion to new assets with multi-chain compatibility
  • Consolidated views and portfolio curation in digital asset markets
  • Whitelisted liquidity pools or restrictions on licensed trading platforms
  • Standardized rules-based products with risk controls, investment profiling, regulatory compliance and specific client preferences for exclusion of certain assets (ESG considerations)

For their clients, digital assets would look like an easily digestible extension of the financial products they are already familiar with. It would simply be another component of products such as pensions, insurance or savings accounts.

Rather than diverting resources into technical infrastructure implementations and integrations, companies could then continue to prioritize their roles in their customer relationships as follows:

  • Financial advice
  • Wallet custody
  • Product structure
  • auditing and reporting
  • Risk management
  • Compliance enforcement

Once you’ve built decentralized access control, the decentralized world of Web3 and the traditional world of finance can finally come together, forever leaving behind the current divergence in user experience, expectations, and regulatory compliance. . This eliminates room in the market for debacles like FTX.

These are well-made digital assets. In 2023, we will see a move towards decentralized infrastructure and better regulation. But more importantly, we will see new solutions that bridge both trends.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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