The last half-year has witnessed an unprecedented acceleration in the adoption of cryptocurrency by financial institutions (FIs) beginning to recognise the value of digital assets. Leading FIs, once cautious, have begun embracing and incorporating blockchain and cryptocurrencies into their operational frameworks.

This shift is primarily driven by the increasing awareness of the immense possibilities that blockchain technology holds in terms of providing secure, efficient, and transparent transactions. The increase in institutional interest has advanced regulatory discussions focused on establishing a secure and strong framework for the wider acceptance of digital assets. This dynamic environment hints at a future where cryptocurrencies take centre stage in the worldwide financial system, creating fresh opportunities for trading, investment, and financial services.

The importance of the industry’s shift from an ‘alternative’ financial system to a regulated and predictable environment cannot be overstated. Ernst & Young’s global strategy consulting arm EY-Parthenon conducted a comprehensive survey of 256 institutional investor decision-makers from around the world. This diverse group included COOs, CEOs, portfolio managers, and heads of transformation. The purpose of the survey was to gain insights into perspectives on digital assets, including sentiment, allocations, future expectations, and views on tokenisation. 

The findings imply that institutional investors have evolved their view of digital assets from “risky outliers” to valuable components of a balanced institutional investment portfolio that generate returns comparable or better than traditional assets. The perceived stigma of dealing in assets that are mostly not backed by real-world collateral has all but disappeared.

Taken together, this represents a groundswell change from even just two years ago when most institutional asset managers stayed well away from digital assets. The usual sentiment of asset managers towards digital assets as explained by Kamil Kaczmarski, a Frankfurt-based partner in Oliver Wyman’s asset management practice, is that they are “an additional asset class that brings the benefit of diversification to a new portfolio”.  

Key milestones and the evolving narrative

Bitcoin ETF: The launch of the first ever Bitcoin Spot Exchange Traded Funds (ETFs) on the US Stock Exchange this January by highly regarded financial institutions such as Grayscale, BlackRock, Franklin, Fidelity and others was a significant milestone in the history of Bitcoin (BTC) given the stiff resistance to the cryptocurrency from institutions till last year. BlackRock saw an impressive $13.9 billion of inflows for its Bitcoin ETF in this first quarter already, paving the way for the final dismantling of barriers to institutional adoption of crypto assets. Following this success, Bitcoin and Ethereum Spot ETFs were approved by Hong Kong in April.

Bitcoin halving: The BTC supply underwent its fourth halving on 20 April 2024. Consequently, the reward for BTC miners was reduced by half, resulting in slower mining of new Bitcoins. This approach to creating scarcity simulates the limited availability of precious metals like gold. The impact of this on supply and the resulting price dynamics solidified BTC’s reputation as a reliable digital store of value for institutional investors seeking long-term price stability in crypto assets.

Beyond Bitcoin: Cryptocurrency exchanges and wallet services are now incorporating features that specifically cater to institutional investors, such as advanced security protocols, insurance coverage, and compliance with regulatory standards. A leading product in this space is Blockdaemon’s aptly named institutional wallet, a multi-party computation, or MPC-based multi-asset wallet that allows institutions to apply different levels of policy to client accounts based on the security, know-your-customer (KYC) and anti-money-laundering (AML) classification, making it ideal for institutional crypto-risk environments.

Shifting regulatory landscape: The regulations surrounding AML, countering the financing of terrorism (CFT), and the KYC rule have been undergoing significant changes to adapt to the evolving crypto landscape. These advancements have not only contributed to a more secure and transparent market, but also enhanced the credibility and attractiveness of cryptocurrency to a broader, more risk-averse, mainstream audience.

The proposed Markets in Crypto-Assets (MiCA) Regulation by the European Union (EU) and the impending decisions on Bitcoin accounting by the Financial Accounting Standards Board (FASB) are good examples of the new heightened focus on vigilance and commitment to responsible governance.

MiCA implementation in the EU: The EU adopted MiCA in June 2023 and it is expected to be fully implemented by December 2024. MiCA provides a thorough regulatory framework aimed at creating a well-balanced system that commits to maintaining fair and secure crypto markets without stifling innovation and growth.

The regulations are expected to significantly benefit investor protection, financial stability, and innovation within the space, leading to larger trade volumes and more innovation.

FASB’s decision on Bitcoin accounting standards: On 13 December 2023, FASB issued ASU 2023-08 that directly addresses the accounting and disclosure requirements for certain types of crypto assets. This new guidance requires entities to assess the fair value of certain types of crypto assets and as with other assets, record changes in fair value, as well as provide additional disclosures for each reporting period.

The guidelines are intended to incentivise businesses to integrate crypto assets into their balance sheets with accepted accounting practices, which will lead to broader acceptance and increase its market value. 

IMF perspective: The International Monetary Fund (IMF), the doyen of sovereigns and international financial bodies, has been actively studying crypto assets and the potential impact on macroeconomic and financial stability. This analysis is crucial to fulfilling the IMF mandate of safeguarding the international monetary system and promoting global macroeconomic and financial stability.

Overall, the IMF considers crypto assets to pose significant risks to economies and overall stability. This is particularly the case for adoption of crypto assets in emerging markets and low-income jurisdictions. The IMF posits that widespread adoption of crypto assets in these countries could have negative effects in terms of, in their opinion, seriously undermining the effectiveness of monetary policy, bypassing capital flow management measures, increasing fiscal risks, diverting resources from financing the real economy, and consequently posing a threat to global financial stability.

The IMF believes as well that emerging economies lack the necessary legal and regulatory oversight to effectively manage the adoption of stablecoins, which could consequently lead to capital outflows from local banks, resulting in higher volatility of the local currency and pressure on macroeconomic growth.

Regulation by sovereign jurisdictions, international bodies

However, it is worth noting that the IMF does not believe that regulating and supervising crypto asset issuers and service providers alone will address stability concerns. They do recognise the importance of establishing and effectively implementing regulation and supervision as a crucial basis for improving data collection, implementing effective capital flow measures, and developing sound fiscal and tax policies, all factors that are equally crucial for the adoption and success of institutional crypto.

In September 2023, the IMF, in collaboration with the Financial Stability Board (FSB) and other regulatory authorities worldwide, produced a comprehensive paper, Policies for Crypto-Assets, at the request of the Indian G20 Presidency.

The key takeaways from this document, which will increasingly be implemented by governments and international institutions, are that ensuring a strong regulatory and supervisory framework for crypto-assets is crucial in mitigating risks to macroeconomic and financial stability. Further, regulation and supervision of licenced or registered crypto-asset issuers and service providers, along with appropriate reporting requirements, hold significant importance.

In order to tackle potential threats to financial integrity and prevent the illicit use of the crypto-assets industry by criminals and terrorists, it is crucial for jurisdictions to adopt the AML and CTF standards set forth by the Financial Action Task Force. These standards specifically address virtual assets and virtual asset service providers in terms of the potential risks of money laundering and terrorist financing that may be linked to these entities.

In certain jurisdictions, especially in emerging markets and developing economies, there may be a need for additional focused measures to address specific risks, going beyond the global regulatory baseline, that takes into account individual circumstances and limitations.

James Wallis, vice president, Central Bank Engagements and CBDCs at Ripple offered: “Clearly, although more work is required for the regulatory environment from country to country, over the next 12 to 24 months there will be overall a lot more progress globally to providing an environment to really implement the use of digital currencies, whether that be CBDCs or stablecoins or some other form, scaling up from the proof of concepts and pilots today.”

Anith Daniel, group head of transaction banking services at Emirates NBD, said: "Tokenisation and digital currency are seeing a lot of interest and are likely to fuel the next wave of innovations. While the technology has progressed in leaps and bounds, use cases have still not progressed to commercial usage at scale pending clarity on regulations and interoperability.  There are very interesting prospects with respect to 24/7 [availability], instant [transactions], programmability, etc.  These are exciting prospects and certainly something to keep track of."

The legal, regulatory, and governance developments at regional, national, and international levels have played a significant role in shaping the future of the crypto finance landscape. These developments have focused on promoting transparency, protecting investors, and fostering responsible growth. As the industry matures, clear regulations and increased institutional involvement will be crucial in shaping its future.

These significant shifts in the legal environment seek to support and encourage the growing crypto ecosystem. They are guiding the industry towards a future where cryptocurrency is seamlessly integrated into everyday finances. 

Trading and payments

Programmable payments: The use of blockchain technology for programmable payments is becoming more prevalent among financial institutions. It is worth mentioning that JP Morgan has recently introduced programmable payments through its Onyx platform. This move showcases the practical application of blockchain technology, allowing institutional clients to carry out real-time, intricate transactions.

Cross-border transactions: Cryptocurrencies have facilitated faster and more efficient cross-border transactions. Traditional payment systems often involve intermediaries, delays, and high fees. In contrast, cryptocurrencies enable near-instantaneous transfers with reduced costs. Banco Santander reduced processing time for international bank transfers from three-to-five days to seconds, and substantially decreased fees for cross-border transactions using blockchain.

Juniper Research estimates, in fact, that business-to-business (B2B) cross-border payments on blockchains will account for 11% of the total B2B international payments by 2024. Stellar is a blockchain platform designed specifically to simplify cross-border transactions and facilitate accessible cross-border payment services using its native cryptocurrency, XLM, to bridge different currencies.

Decentralised exchanges (DEXs): DEXs facilitate peer-to-peer trading by eliminating the need for centralised intermediaries and are much in vogue. DEXs provide accessibility to, and facilitate the trading of tokens while offering liquidity providers with passive income opportunities. 

The top five DEXs in 2024 are Uniswap, Curve, PancakeSwap, Balancer, and SushiSwap. To give an idea of the scale and rate of adoption here, Uniswap, a multi-chain DEX, as of March 2024, transacted $90.11 billion in monthly volume (+97.1%) across $7.11 billion in liquidity (+18.9%).

Sovereign finance and asset finance

Central bank digital currencies (CBDCs): Currently, 134 countries and currency unions, representing 98% of global GDP, are exploring CBDCs compared to just 35 in May 2020. Sixty-eight countries are already in the advanced phases of exploration, development, pilot, or launch, while three countries—the Bahamas, Jamaica and Nigeria have fully launched a CBDC. On 29 January 2024, the United Arab Emirates and China executed their first cross-border CBDC transaction in digital Dirham and Renminbi, valued at $13.6 million, using the mBridge CBDC platform.

Stablecoin developments and institutional adoption: The institutional interest in stablecoins has grown, exemplified by initiatives like Ripple’s entrance into the stablecoin market, aiming to rival incumbents like Tether and USD Coin (USDC). Such moves are poised to enhance the liquidity and stability of digital asset transactions for institutional purposes. Governments are taking notice, with the UK planning new legislation for stablecoins as well as crypto staking, exchange and custody by July this year.

Tokenisation of assets: Assets are being tokenised on blockchain platforms, including real-world assets like real estate, art, or stocks. This enables the option for shared ownership, improved ease of buying and selling, and streamlined transfer of ownership. Top asset tokenisation platforms like ADDX, Bitbond, Securrency, and tZERO offer a range of services from increased liquidity and automated trading to diversified investment portfolios.

Yat Siu, CEO of Animoca and co-founder of Animoca Brands, commented: “Web3 is a lot more than just the cryptographic layer. It’s one of the fastest growing ecosystems today, with total digital assets exceeding $1.8 trillion in size. Blockchain and tokenisation enable the implementation of digital ownership rights and governance including voting, and can scale it to an organisation that could be owned by tens of millions or even hundreds of millions of people. These DAOs [decentralised autonomous organisations] on a weekly basis, are very powerful for digital and financial inclusion.”

Yat Siu, CEO of Animoca and co-founder of Animoca Brands

Ronit Ghose, global head of future of finance at Citi, industry chair, of future of finance at MENA Fintech Association, and author of Future Money said: “Real world assets, or the tokenisation of existing financial assets on blockchains, have been the leading cryptocurrency narrative of 2024. The increasing institutionalisation of cryptocurrencies, driven by the growing importance of traditional buyside firms and their digital asset activities, will continue in 2025. As a result, cryptocurrencies will have an increasingly professional market structure and size.”

Ronit Ghose, Global Head for Future of Finance at Citi Global Insights, Citi

Money markets and startup finance

Initial coin offerings (ICOs) and token sales: ICOs were popular fundraising mechanisms for startups. Globally, ICOs have raised over $50 billion for crypto startups since their inception. However, over 80% of ICOs were scams and they have a really low survival rate of 10% (startups surviving for a year after ICO). The biggest ICO scam, Bitconnect defrauded investors of $2.6 billion. These factors have been led to increased regulatory scrutiny and concerns about investor protection and increasingly, security token offerings (STOs) are emerging as an alternative that regulators are more comfortable with.

Financial services providers

Competition and collaboration: Traditional banks face competition from crypto-native companies. Some banks are integrating crypto services, while others remain cautious due to regulatory uncertainties.

Custodial services: Banks and financial institutions are offering custody solutions for institutional investors holding cryptocurrencies.

As an example, on 15 April 2024, Landesbank Baden-Württemberg, the largest federal bank in Germany, announced it would provide crypto custody services to corporate clients, with a market launch planned for the second half of 2024, in partnership with the Austrian exchange Bitpanda.

Risk management: The crypto market’s volatility poses challenges for risk management. Banks need to balance innovation with security. The introduction of advanced blockchain solutions like the Merlin Chain has set new standards for blockchain security and innovation. Such enhancements are crucial for gaining institutional trust.

TradFi and DeFi: Traditional finance giants are increasingly willing to partner with DeFI players, which was simply inconceivable for most of the last decade. JPMorgan is now offering tokenised funds to its clients in a trend-setting partnership with Provenance Blockchain, infrastructure provider Oasis Pro and interoperability layer Axelar.

Paypal has partnered with New York Department for Financial Services (NYDFS)-regulated Blockchain infrastructure provider Paxos to offer stablecoins to its users while APEX, the largest fund administrator, and XBTO collaborated to provide regulated custody and digital assets execution to their institutional clients.

Coming up in crypto

The year is shaping up to be transformative for crypto finance, with significant developments anticipated across banking, payments, financial services, and asset management.

NFTs and Ordinals on Bitcoin: The emergence of Bitcoin-based non-fungible tokens (NFTs) through the Ordinals protocol has introduced a new layer of functionality to Bitcoin, expanding its use cases beyond simple transactions. This development has sparked considerable interest and activity, suggesting a broader acceptance and utility of NFTs within institutional frameworks.

One example of a Bitcoin Ordinal is the first NFT from the Taproot Wizard collection, which at its issuance, was part of the largest Bitcoin transaction of all time and was included in the largest Bitcoin block ever. Several commentators noted that the Bitcoin price revival in 2023 seemed closely correlated to the take-off of Ordinals. 2024 will be the year when Ordinals come to the fore.

Banking and payments: The integration of blockchain and advancements in digital payments will continue to have a significant impact on the banking and payments industry. Real-time and instant payments are gaining popularity in various regions, especially in Europe, while the United States is slowly embracing systems like FedNow. 

Crypto for everyday purchases: More merchants will accept cryptocurrencies as payment, especially stablecoins. Giants like Mastercard provide products like Tap, a prepaid card topped up with fiat when the consumer sells crypto holdings, and Nexo, a card that lets a consumer access a credit line based on their verified present crypto holdings. Gemini allows consumers to earn rewards in crypto directly, based on fiat spending.

Micropayments: Cryptocurrencies could gain traction for micropayments, enabling new use cases in gaming, content subscription models, and the Internet of Things (IoT). Bitcoin’s Lightning Network enables faster and cheaper micropayments while the Brave browser with its Brave Payment feature allows micropayments to favourite websites.

In 2024, as crypto intersects with traditional finance, the focus includes enhancing digital payments, adapting to regulations, leveraging tech for asset management, and exploring new blockchain applications, marking a pivotal year for institutional crypto.