Clearing the Last Hurdles to Institutional Adoption of Crypto

Cryptocurrencies have seen amazing growth over the past decade, outperforming every other asset class. While institutional investors initially looked at digital assets skeptically, the continued resilience of crypto has undoubtedly changed their perspective.

2021 saw institutional interest in crypto soar significantly. Institutional clients—primarily hedge funds, registered investment advisers, and some companies—traded $1.14 trillion worth of cryptocurrencies just on Coinbase alone, compared to $120 billion the year before.

That level is more than double the retail trading volume of $535 billion. Outside of this trading activity, Goldman Sachs, my previous employer, recently began exploring crypto options. As part of its crypto strategy, Goldman recently invested in the Series D funding for Anchorage Digital, where I now work.

These bets have proved fruitful for those willing to dip their toes into the crypto waters. According to recent research, “those that have started to put capital to work in transparent exchange-traded funds tracking cryptocurrencies have outperformed their peers by 2.8 percent on an annualized basis between March 2018 and March 2020.”

There are plenty of reasons why the risk-adjusted return on Bitcoin looks favorable in today’s markets, including the broader global macro environment.

Crypto’s growing appeal

Crypto is entering the institutional mainstream. A September 2021 survey by Fidelity found that 52% of respondents said they have invested in Bitcoin or other cryptocurrencies, while a study released by Alternative Investment Management Association last May found 47% of traditional hedge funds have entered or plan to enter the crypto market.

Now, there are still factors holding back further institutional participation in crypto:A lack of clarity around regulations as well as concerns about asset security are the main culprits, but things are starting to change.

Asset security concerns can be abated when institutions work with regulated digital asset platforms such as Anchorage Digital, which uses proprietary technology to safely store digital assets. As institutions partner with secure, compliant crypto custodians, their trust in the sector will grow.

There’s also been more clarity on the regulatory front. A recent executive order signals that the Biden Administration will take a whole-of-government approach to digital asset regulation, a move the crypto community has largely applauded. The administration recognizes the value of digital assets, and the executive order tasks regulators with figuring out how to best protect market participants while maintaining U.S. leadership in the space.

These tailwinds should give institutions more confidence to explore digital assets and their underlying technology.

The benefits of blockchain

Institutions also need to focus on the potential of blockchain—the technology powering crypto—to usher in the next wave of innovation in finance. Blockchain can help solve long-standing issues in the financial system, such as counterfeiting, double spending and delivery failures. It can also optimize functions such as borrow and lend, collateral management and settlement.

Blockchain technology will bring about nothing less than a transformation in the way we interact with money, but it will take a large, collective effort by the finance sector, as well as continued investment in cryptocurrencies and the companies who are building the future rails of our industry.

The challenge is that legacy financial institutions are not technology companies. Although there’s been plenty of innovation in the past few decades, behind the scenes wire transfers and other functions still operate much like they have in the past. That’s by design—these institutions move slowly and carefully when it comes to building new technology.

In order to realize the potential of blockchain, financial institutions need to partner with technology companies that have expertise in the fast-moving digital assets realm and the regulatory structure that institutions need for their own compliance. For example, Anchorage Digital has partnered with Nasdaq to serve as a core custodian for the Nasdaq Crypto Index, giving asset managers access to digital assets through a blended index.

A bright financial future

Crypto and blockchain technology will empower asset managers to incorporate the highest performing assets of today into their portfolios. It’ll bring more efficiency to trading desks, with faster settlement times and other revolutionary operational changes that will further help participants mitigate risk.

These innovations will also empower people in their day-to-day lives. Twenty years ago, it would be difficult to imagine the impact of the internet and smartphones on everyday life. Now, most of us are lost without these vital tools. Crypto will eventually be the financial system. Because of blockchain, there will be more transparency and accountability, and financial services will be available to more people than ever before, including the millions without access to bank accounts.

Now that the industry has better insights into potential regulations, and the technology exists for institutions to protect their digital assets, it’s only a matter of time before a rapidly growing segment of institutional players will be full participants in the blockchain economy.

Yuriy V. Anosov is the Head of Trading at Anchorage Digital. Prior to joining Anchorage Digital, Yuriy worked as a trader for Galois Capital, a quantitative digital assets fund and spent 10 years at Goldman Sachs Asset Management, most recently as a trader on the Money Markets Portfolio Management team. Prior to joining Goldman Sachs, Yuriy served in the US Air Force for 6 years. Yuriy is a CFA charterholder and holds an MBA from INSEAD.