We started working on the Global Digital Finance (GDF) project in mid-2017 when indications were the Initial Coin Offering (ICO) market was getting very hot. As a community of digital pluralists with experience in retail and capital markets, FinTech, regulation and Blockchain, the community is what I call “long on Digital Assets”, and we were concerned about the quality of many of the tokens, and the negative impact for investors.

Our goal was to write a token taxonomy and a code of conduct by convening an open global community of willing professional contributors, the “power of the crowd”. Following a rigorous process of development, peer review, open public consultation, and regulator purview, we offered the taxonomy and code to global industry players and means of demonstrating they were abiding by jurisdictional and global laws and meeting a high standard in their crypto and digital asset endeavours.

Fast forward to today, GDF has 10 codes of conduct and over 150 members in our Code Programme, including firms like Coinbase, Bitmex, Huobi, R3, ConsenSys, ING, London Stock Exchange Group, Standard Chartered and EY, and hundreds of community members who contribute to working groups, opens standards, and reports. This progress the community has made is a powerful indicator of how mature the crypto and Digital Assets sector has become.

GDF’s main priority in 2022, as ranked by our members, is to deliver advocacy and outreach. We host a GDF Regulator (ONLY) Forum with over 35 jurisdictional regulators and agencies in attendance quarterly and deliver industry responses to key industry and public consultations. We are also focused on outreach programs with policymakers and regulators on DeFi, Stablecoins, and RegTech / SupTech, and with central bankers on CBDCs.

2022 has already seen an unprecedented level of activity f rom global policymakers and regulators around crypto, and the Ukraine crisis has sharpened the focus on sanctions. War has again come to Europe and along with it, a greater degree of uncertainty for investors. The Ukraine crisis has seen an immediate impact on markets, with the West’s enforcement of sanctions against Russia including its Central Bank, and individuals associated with the regime.

Safe harbor assets such as gold are back in demand with the prices crossing the US$2,000 barriers, not crossed since 2020. Goldman Sachs analysis indicates that Bitcoin has 20 percent of the store of value market, which it shares with gold, and that a US$100,000 price per Bitcoin is hypothetically achievable over the next five years with rising prices.

Bitcoin remains the best-performing asset class over the past ten years, across all other asset classes on the planet, with an annualized compound return rate of more than 200%, with only two draw down years over the period where 2018 saw most major asset classes in the red. The crypto markets swelled to over US$3 trillion in late 2021, aided by institutions of all types getting into the market, before January markets pulled back leaving crypto markets at US$2 trillion.

Figure 1: Charlie Billello 10 asset class performance

A 2021 Fidelity survey of institutional investors found that 70% were already invested in crypto. Diversified portfolios have been popular with investors over the past 20 years with allocations to alternatives such as commodities, and allocations to cryptocurrencies with their outstanding performance and low historic correlation to other asset classes is understandable.

Institutions are using a range of vehicles to access the cryptocurrency markets from funds like the Grayscale Bitcoin Trust fund (GBTC) which trades directly on the U.S. stock market to NYDIG, the crypto fund manager. Exposure to crypto through publicly traded companies like Coinbase is proving popular, as is accessing the many ETFs available, including specialist areas like the crypto exchanges or bitcoin miners through ETFs offered by Valkyerie.

Figure 2: Future purchase intent of Digital Assets (US & Europe) (source)

A healthy indicator of the demand that is driving traditional financial institutions to offer crypto products and services is the number of institutional investors offering crypto services. Custodians lead the way here with Fidelity, State Street, ING, Standard Chartered, and BNY Mellon all offering crypto custody solutions.

U.S. pension fund the Houston Firefighters’ Relief and Retirement Fund (HFRRF) announced in 2021 that it was investing US$25 million in bitcoin, the first time a U.S. pension fund is reported to have directly in cryptocurrencies. Fairfax County’s Virginia’s Police Officers Retirement System have taken exposures in cryptocurrency, and PIMCO announced in October that several of its fund portfolios are already trading crypto- linked securities.

In November 2021, Swiss Digital Exchange (SDX) issued its first native digital bond with Credit Suisse and UBS Investment Bank on R3 infrastructure and has announced that digital security tokens are not far behind. With over 100 central bank projects looking at central bank digital currencies (CBDCs) including the U.S. Fed, the Bank of England and the European Central Bank, we can expect to see major Western bank issues CBDCs sometime over the next five years, with the Swiss National Bank Project Helvetia releasing its wholesale CBDC project findings shortly.

Digital security tokens, technology that moves private market securities onto smart contracts onto the Blockchain, will open up an estimated US$1 trillion market for primary and secondary funding to all investment segments and bring the access and transparency of public markets to private markets. FinP2P, a decentralized private market digital securities network is leading the way here following a pilot with many of the world’s top financial institutions and is launching this spring.

Following the U.S. Senate Agriculture hearings in February, there was bipartisan support, including cross- industry support, for the Commodity Future Trading Commission (CFTC) to have purview of regulation of the crypto spot market. President Biden’s Executive recent Order (EO) for Digital Assets focuses on ensuring the U.S. is at the forefront of Digital Assets innovation.

The EO has given agencies up to 180 days to develop their strategies and policies for crypto, Digital Assets, Blockchain technology, and U.S. dollar CBDCs, with the mandate to coordinate across agencies. At the heart of the EO is allowing the Digital Assets sector to flourish, while ensuring that the appropriate consumer, market and fraud protections are built into the policy and legal f ramework.

The European Parliament’s ECON Committee recently voted on the Markets in Crypto Assets Regulation (MiCA), voting down references to phasing out consensus mechanisms that did not meet a new criteria of minimum environmental sustainability standards and instead approving the rapporteur’s compromise and giving him a mandate to go straight through to trilogues. The proof-of-work consensus mechanism underpins many distributed ledger technologies (DLT) including the Bitcoin network on the public Blockchain that mines Bitcoins.

Outstanding crypto-asset performance is one thing, however, the many signs that institutions are adopting crypto and Digital Assets are also a strong indicator of future demand. When major governments start to champion agencies to encourage the innovation of Digital Assets that are safe for consumers and markets, prepare for greater longer-term mass adoption of this asset class.

This article is from The Wealth Mosaic's WealthTech Views Report: DLT & Blockchain 2022. Access the full report here.