Digital Digest: Volatility and the Digital Transformation
Our third edition of the State Street Digital Digest focuses on recent market volatility around cryptocurrency — what has been popularly dubbed this summer’s “crypto winter” — which negatively impacted an influx of new investors in the space.
In addition to insights from our own experts, in this issue we introduce perspectives from our client, Fideuram Intesa Sanpaolo Private Banking. Other topics explored in the Digital Digest include regulatory trends in cryptocurrency, governance in decentralized finance networks, the potential for distributing digitally tokenized assets through ETFs, and the growth of stablecoins.
Read the key take-aways, and download the full report:
Bitcoin Investment Is Becoming More Long-Term
The entities, individuals or institutions that have bought Bitcoin on a net basis this year are long-term buyers (as entities that have bought, cumulatively, at least three times more Bitcoin than they have sold). Data from Glassnode shows that these investors now hold 78 percent of Bitcoin supply. This is the highest share in five-years and is a marked change in behavior to the 2017/18 crash, when long-term holdings capitulated.
Asset Manager Experience Also Points to More Long-Term Interest in Crypto
Fideuram Chief Operating Officer, Riccardo Negro, offers his perspective on increased institutional interest in Bitcoin, Ethereum and other cryptocurrencies. “We see many institutional investors deciding to buy cryptocurrency and hold it for a long time, for portfolio diversification. And although the price of Bitcoin indicates a period of consolidation for the crypto market, I see cryptoassets playing an important role in the future of the institutional portfolio,” he says.
International Bodies Are Rallying Around Global Crypto Standards
In July, the Financial Stability Board (FSB), an international body comprising the ministers of finance and central bank governors of G20 countries and beyond, as well as organizations having a major role in global financial stability, issued a “Statement on International Regulation and Supervision of Cryptoasset Activities”. The statement stressed following a path of “same activity, same risk, same regulation” when approaching cryptoasset activities, voiced support for timely implementation of international standards, and noted the need to adopt regulations to address financial stability risks arising from cryptoassets; in particular, stablecoins.
The Ethereum Merge Is Here
Ethereum, a Blockchain platform used for crypto asset transactions, including of its own crypto currency Ether, has recently engaged in a change of governance model. “Ethereum 2.0” limits voting rights to approved validators, rather than all successful miners of Ether (a switch known as “proof of work” to “proof of stake”), who must own at least 32 Ether and will only have voting rights equal to a maximum of 32 Ether, regardless of how many they own. There will be a system of sanctions for inappropriate voting.
ETFs Set to Benefit from Blockchain Technology in Alternatives
ETFs are in poll position to become a preferred fund-based wrapper for retail investors looking for access to private markets and other illiquid alternatives, via digital fractionalization. It is already the fastest-growing fund type of the past decade and its existing advantages in terms of liquidity and low fees will remain in a digital asset fund environment. Exchange traded products are also at the forefront of existing use cases for blockchain in fund management. They make up 46 of the 73 funds globally, with assets under management of approximately US$70 billion, either holding direct cryptocurrency or trading cryptocurrency futures.
Stablecoin Growth Is Bringing Regulatory Challenges
According to analysis from State Street Global Advisors, the regulation and mainstreaming of stablecoins will deliver a large tailwind to the growth of decentralized finance, with macro policy implications. The overarching question for regulators with regard to stablecoin regulation is whether to create a fresh set of regulations or to adapt existing banking or securities regulations. They expect policymakers to treat stablecoins under securities regulation, similar to that of money market funds. Specific rules will aim to ensure standardization, limit systemic risk, and heighten investor and household protection.