The urge for institutional money flowing into Bitcoin (BTC) in recent months has resulted in cryptocurrencies making headlines – at least as a new asset, at best as a necessity. There is undoubtedly a trend in the market to increase awareness and acceptance of digital assets as a new class of investment funds.
A report by Fidelity Digital Assets from June 2020 found that 80% of organizations in the US and Europe are at least interested in investing in cryptocurrencies, while more than a third of them have already invested in some form of digital assets, with Bitcoin as the most popular investment. option. …
A good starting point for institutional investors would be to distinguish between cryptocurrencies (especially Bitcoin) and decentralized financial products. So far, most of the institutional issues have been related to the simple storage of bitcoins (or bitcoin futures), with some players covering the more exotic DeFi products.
The recent race against Bitcoin has been driven by a number of reasons. Some may cite the relative maturity of the market and the increased liquidity, which means that large trades can now be made without causing excessive market movement. Others may refer to abnormally high volatility, high returns and positive kurtosis (which means a higher probability of outliers compared to the stock market) of the asset class. It also highlighted the history of Bitcoin and its limited offerings, making it look like digital gold, making it all the more attractive in a world of asset price inflation and unbridled monetary and fiscal policy.
However, the main reason for the current institutional interest in cryptocurrencies is less philosophical and more practical and has to do with outdated rules and infrastructure.
Financial institutions are old giants that manage billions of dollars in other people’s money, and it is therefore required by law to comply with many rules regarding the type of assets they own, where they are held and how they are held.
On the one hand, the blockchain and cryptocurrency industries have made a leap forward in the last two years in terms of regulatory clarity, at least in most developed markets. On the other hand, the development of a high-level infrastructure that gives institutional participants an operating model similar to that found in the traditional securities world now allows them to invest directly in digital assets, take custody, or indirectly through derivatives and funds. Each of these factors gives institutional investors enough confidence to finally dive into cryptocurrency.
Keeping Your Business Interested: What About Other DeFi Products?
Given that the yield on 10-year US government bonds is just over 1%, the next important step for institutions is to consider investing in decentralized yield products. This may seem obvious when prices are in recession, with DeFi protocols for USD stack coins reaching anywhere from 2% to 12% per year, not to mention the more bizarre protocols that produce north of 250% per year. year.
However, DeFi is in its infancy, and liquidity is still very low compared to more established asset classes for organizations interested in updating their knowledge, let alone their IT systems to host capital. In addition, there are real and serious operational and regulatory risks in terms of transparency, regulations and management of these products.
There are several things that need to be developed – and most of them are already underway – to ensure institutional interest in DeFi products, either at the settlement level, asset level, application level or assembly level.
The primary challenge for organizations is to ensure legitimacy and compliance with their DeFi peers at both the protocol and execution level of the sale.
A solution is a protocol that recognizes the status of the owner of a wallet or other protocol, and informs the counterparty whether it meets the requirements in terms of compliance, management and accountability, and code revision as an option. for attackers, the use of the system is repeatedly proven.
This decision must go hand in hand with the insurance process in order to transfer the risk of error, for example in verification to a third party. We are beginning to see some insurance protocols and mutual insurance products emerging, and Defi’s accreditation and liquidity must be large enough to prevent investment of time, money and expertise to develop fully usable corporate insurance products.