Institutional investors and regulators hold financial technologies to a rigorous standard. That approach largely informed institutional interest in decentralised finance technologies through the end of the last decade.
In the last year, however, institutional engagement with decentralised finance has grown conspicuously. Through investments, partnerships, and their own in-house blockchain projects, organisations such as
Below, we explore how the institutional approach to
Institutions quietly followed this space for years, then they made their moves
In late 2019 and early 2020, researchers hired by Fidelity Digital Assets surveyed nearly 800 institutional investors across the US and
Though these investors had historically ‘remained on the sidelines’ because of the perceived risks inherent in digital assets, Fidelity writes, more than one-third of respondents (36 per cent) said they were currently invested in digital assets. That’s up from 22 per cent from the previous years survey, an increase of about 64 per cent.
That 64 per cent jump is best understood as an indicator of a wider trend. As a general rule, investors get acquainted with
Institutions followed that same path, and 2020 appears to have been the year in which institutional interest tipped toward committed, genuine engagement with
Fast-forward to the spring of 2021, and you begin to see ‘funds, trading firms, and centralised yield platforms providing the bulk of the liquidity’ in the
‘As the total value locked (TVL) in
Of course, institutions know to temper their expectations when money starts to flow this freely. After all, there has not been a significant test of the resilience of major
“It is not clear what will happen to interconnected protocols when one or more of them experience serious, market-wide price dislocation or large scale technical outages,” Massari and Catalini wrote in
Cautious optimism guides their approach today
While institutional investors are clearly interested in
In
“In the same way that cloud storage could suddenly give a start-up infinite storage capacity by plugging into an existing application,
“Want to buy and sell in dollars? Stablecoins can be used anywhere. Want to set up a lending operation? You don’t need to build your own stablecoin, because you can use any of the digital currencies already out there.”
It is worth noting that Brody published this piece just a couple of weeks after EY announced a fresh
Everyone is learning and building out their capabilities. Some organisations, however, are further along than others.
Three institutions to watch
JP Morgan
In
JP Morgan’s involvement was particularly noteworthy because that company already had a strong relationship with
Today, JP Morgan’s in-house blockchain projects fall within the Onyx portfolio. Ongoing projects include Liink, a blockchain-based network built specifically for institutions, and JPM Coin.
Goldman Sachs
In
These two deals are clear indicators of where Goldman Sachs is pivoting part of its global strategy. More recently, the bank expanded its crypto trading desk, catering for the increased demand from key institutional clients. This increased client demand has taken Goldman Sachs in a new direction as the bank expands its execution, advisory and investment functions within the sector.
“What’s different today is the extent of institutional interest, coupled with very strong demand across the wealth management franchise,”
“The product offering is broader as people are looking beyond bitcoin at the potential of the underlying blockchain infrastructure to transform the way markets behave.”
Bank of America
This might be a surprising inclusion as
That said, the company owns more than 60 blockchain-related patents, CEO
Though Moynihan is on record saying
Institutions still have serious questions
Citigroup also made news this past spring when the
Two things stood out in that report:
- First was the lack of specificity. Citigroup did not commit to any projects, plans, or directions in that report.
- Second was how frequently Citi’s executives tried to temper everyone’s excitement about that news. “I believe that crypto is here to stay and that we are just at the very beginning of the market”,
Itay Tuchman , Citigroup’s global head of foreign exchange, told the FT. “This isn’t a space race. There is room for more than just one flag.”
Citi’s pump-the-brakes approach underscores some of the questions institutions still have about decentralised finance, and about blockchains in general. Those questions include:
- Whether decentralised finance offers a demonstrably different type of service than traditional financial activities do.
- Who would stand to gain, or lose, the most from a mainstream deployment of
DeFi ? - Whether
DeFi would replace, complement, or exist in parallel to traditional financial activities. - What regulations will emerge in response to the maturation of
DeFi ?
“The role of decentralised finance remains to be seen,”
“A key step on that path could be the upgrade from Ethereum 1.0 to Ethereum 2.0 through 2021 and 2022, which will allow more transactions to go through the network,” Pomeroy and Mackel noted.
“If this were to happen, more traditional financial activities within the likes of insurance, housing transactions, and lending could be disrupted – but the nature of how quickly and when will depend heavily on the progress on the technology front.”
Conclusion
Several institutional investors have publicly embraced
However, it is important to emphasise that these organisations are taking cautious steps into this space. Due to regulation and resource constraints being focused on managing their traditional finance business lines, these types of organisations are throttled in their ability to fully monetise and build sizeable
This has allowed smaller, more nimble corporates and institutions to effectively monetise the 24×7
As for the tier one banks and blue-chip institutions; by the time they truly enter this market on an industrial scale it will most likely be via acquisition to buy up the market share of those smaller firms that established their presence earlier.
At Appold, institutional
For further questions and advice, please feel free to contact us directly.
Rob Gaskell
Founder and Partner – Appold
Email: Info@Appold.com
LinkedIn: https://www.linkedin.com/company/appold
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