Welcome to the first Global Digital Finance x The Defiant column, bringing you the stories and discussions that have caught our eye this month.
From market infrastructure to institutional investors to the digitalization of private markets, we’ll look at how decentralization is reshaping traditional finance. .
ETPs showing that Digital assets are ‘here to stay’
Bitcoin-indexed products were launched on Euronext stock exchanges in Paris and Amsterdam at the beginning of June. Four investment firms, WisdomTree, VanEck, 21Shares, and ETC group, listed nine bitcoin and Ethereum ETPs.
With many ETPs already trading on the Deutsche Borse Xetra market, the four firms looked to expand the products due to investor demand. Quoted in Coindesk, Jason Guthrie, head of digital assets – Europe at WisdomTree says:
“This milestone represents the growing acceptance of cryptocurrencies, the evolving European regulatory landscape, and the latest signal that digital assets are here to stay.”
The move shows an increased willingness on the part of European regulators to list cryptocurrency ETPs as the asset class grows in popularity. Investors are still awaiting approval of crypto ETPs from the U.S. Securities and Exchange Commission.
Financial Institutions continue to show interest in digital assets
State Street announced their plans for a division dedicated to digital finance. State Street Digital will include the custodian’s existing digital services as well as covering cryptocurrencies, Central Bank Digital Currencies (CBDCs), and tokenization.
According to Nickel Digital Asset Management, institutional adoption of crypto continues to rise, with more publicly traded firms adding Bitcoin to their treasuries during the first four months of 2021 than the entirety of 2020. As reported in Cointelegraph, “more than $6.5 billion worth of BTC — close to 1% of the crypto asset’s entire capitalization — is held by 19 publicly-listed companies. A further 5.75% of Bitcoin’s market cap is held by exchange-traded products and closed-ended trusts”
Coinbase recently reported that it had seen a 170% increase in institutional investment in Bitcoin. Coinbase Institutional unveiled their plans for Coinbase Prime at the end of May, which will be a fully integrated prime brokerage solution, separate from Coinbase Exchange.
But is the price linked?
Although the institutional interest in crypto has continued to grow, the direct link between this activity and Bitcoin prices in the first half of 2021 has been debated. Chainalysis has released its data looking at whether the $50+ bitcoin prices between February-May were supported by more than just hype.
According to Chief Economist Philip Gradwell, “realized losses since 10 May have been limited at $2 billion for investors acquiring in the last 3 months and $10 billion for services (primarily exchanges), while being minimal for other investor groups in aggregate. So overall, investors appear to be holding, even if they are not buying much, suggesting conviction in Bitcoin from earlier in the year continues.
“However, outflows from crypto-to-fiat exchanges to self-hosted wallets declined from mid-March. So, when prices were at their highest, investor accumulation was at its lowest. This suggests the price in April was driven by an illiquid market and a lot of hype, rather than institutional buying.”
You can read more of Gradwell’s analysis in the Chainalysis Market Intel Report.
The CBDC Debate
China’s Digital Currency Electronic Payment (DCEP) has now been trialed with more than 4 million transactions and $314million spent so far. Some have argued that the reception by Chinese consumers was lukewarm at best. The Economist Intelligence Unit reported that many had privacy and security concerns with regards to using CBDCs in payments.
CBDC projects have continued to develop across central banks. The ASEAN Financial Innovation Network has launched a digital currency sandbox, allowing participants to test their strategies on the Corda platform.
Meanwhile, Dante Disparte, Head of Global Policy at Circle, argues that a CBDC would be bad for the US. Contrary to the argument that the US is losing ground to China by not having released a live CBDC, he argues that the US is already winning the race on the future of money and payments.
If the future of financial optionality relies on a major upgrade of the technology stack supporting more open financial services innovation, Disparte argues that this is best led by the private sector:
“In the maiden decade of blockchain, digital currencies and crypto assets, a $2 trillion industry was born largely on public digital commons, rather than on risk-prone and costly technology implied by a government-administered CBDC, which would shift technology risk to the public sector and, thereby, to taxpayers.”
The Bank of England and Bank of International Settlements release papers on digital money
The recent Bank of England discussion paper on digital money explores both CBDCs and stablecoins. The paper proposes that the rise in the use of stablecoins is inevitable and will require regulation. That said, a secure regulatory environment would create the foundation for sustainable innovation, particularly within payments.
The BIS released their paper on the digitalization of money, highlighting that banks will either create their own CBDCs or develop complex policy frameworks for stablecoins and cryptocurrencies. The BIS has previously reported that 86% of Central Banks are actively researching the potential for CBDCs.
That’s all for now, but we’ll be back. We’d love to hear from you: [email protected]