Once dominated by young and savvy retail investors, the cryptocurrency market has seen increasing interest lately from institutional investors and large fintech firms. For instance, Grayscale Investments most recently added 19,879 Bitcoin (BTC) to its Bitcoin Trust, bringing the firm’s total volume of the predominant cryptocurrency close to a whopping 400,000.
The investment firm further noted in a tweet on June 25 that it is managing $4.1 billion dollars worth of digital assets. It’s also worth noting that leading payment provider PayPal may soon be incorporating cryptocurrency options.
While some individuals in the crypto community may cringe at the thought, recent findings from Big Four firm KPMG explain that institutionalization is needed now more than ever in order for cryptocurrencies to meet their full potential. A KPMG document titled “Cryptocurrencies are here to stay” states:
“Institutionalization is the at scale participation in the market by small and large entities within the global financial ecosystem, including banks, broker dealers, exchanges, payment providers, fintechs and service providers.”
KPMG’s United States blockchain leader, Arun Ghosh, told Cointelegraph that after crypto’s 2017 peak, the space matured in such a way that large asset managers are now looking to add cryptocurrencies to their portfolios. “We are seeing both retail investors and institutional investors with crypto showing up on their balance sheets,” Ghosh said.
And while curiosity in crypto and digital assets from institutions has been brewing over the past year or so, the crypto market has especially become of recent interest. The latest research from Fidelity Digital Assets confirms this notion, indicating that out of about 800 institutional investors surveyed across the U.S. and Europe, 36% are currently invested in digital assets. Findings also show that while only 27% of the 441 U.S. institutions surveyed are exposed to crypto, this is a 22% increase from last year.
Paul Brody, the principle and global innovation leader at Ernst & Young, told Cointelegraph that markets are also seeing a repeat of the 2008 cycle where big monetary stimulus triggered a lot of interest in alternative assets that might be less prone to inflation:
“Compared to the traditional financial markets, the range and choice of offerings looks small, but companies are getting a lot better at running through the regulatory challenges associated with cryptocurrencies and bringing product to market that aren’t available in other markets.”
Brody further mentioned that there are now a lot more choices beyond crypto for investors, including asset-backed tokens based on real estate, fiat currencies and other commodities, along with a wider range of services available that are built in the decentralized finance ecosystem. “Combine even a small re-allocation of assets with a range of new offerings and you have a recipe for significant growth in this industry from its existing base,” Brody said.
New tools focused on data analytics
As 2020 may turn out to be a crucial year for institutional interest in the crypto market, Big Four firms have been ramping up their management offerings to accommodate their institutional clientele. Tools that use data analytics to address security, regulatory compliance and privacy around crypto and digital assets are particularly important for institutional investors and fintech companies.
For instance, KPMG launched a cryptocurrency management platform called Chain Fusion. This comprehensive tool leverages data analytics to streamline the ability for institutions and fintech companies to safely and properly manage their crypto and digital assets in one place.
Sam Wyner, the director and co-lead of the crypto asset services team at KPMG, told Cointelegraph that Chain Fusion was specifically designed to solve data problems faced by traditional financial services companies entering the crypto space: “Data challenges are much more complex in the crypto and digital asset world, as most organizations — whether they are custodians or exchanges — have lots of systems and information.” He added that “all of that data is connected in different ways, making it difficult to put that data together clearly and make sense of it.”
According to Wyner, Chain Fusion is a platform that creates one structured, consistent data model from a variety of different information sources. For example, Wyner mentioned that there is a ton of data generated when fintech companies or institutions make crypto or digital asset transactions:
“There could be fiat transactions that need to go through multiple jurisdictions, or there could be a number of on-chain transactions. There could also be transactions going through different payment providers in various currencies. There is a lot of different information containing important analytics that traditional organizations require to safely and properly operate in the crypto world.”
It’s important to point out that financial services regulatory compliance is data-intensive and, therefore, requires analytics from different sources to ensure that all challenges are addressed. For example, Wyner mentioned that Know Your Customer and Anti-Money Laundering transaction monitoring is something that traditional organizations must pay close attention to as customers move assets in and out of their businesses. KPMG’s “Cracking Crypto Custody” report further explains this, saying:
“Even established financial institutions which already have mature AML and KYC compliance programs in place are challenged to enhance their methodologies to address the unique considerations for cryptoassets and related data management challenges. Two of these challenges include foundational aspects of KYC and AML: determining customer asset provenance and meeting transaction monitoring requirements.”
Ghosh from KPMG noted that one of the most important aspects of Chain Fusion is its analytical decision framework. He also pointed out that regulatory compliance based on analytics hasn’t really been done before, but that it is needed now more than ever to accommodate institutional interest.
Yet while the concept may be new, Big Four firm EY has also embraced data analytics to address challenges faced by institutions and fintech companies. According to Brody, the single largest hurdle for traditional financial organizations entering the crypto space is regulatory compliance. He explained that many of the firm’s large institutional clients are being extremely cautious about getting involved in digital assets, as a lot is at stake if something does go wrong.
Regarding analytics, Brody pointed out that EY’s Blockchain Analyzer tool, which was previously only available to the firm’s audit teams, is now accessible to private clients. According to an April 2019 press release, the second-generation blockchain analyzer tool uses data analytics to help enable financial reporting, forensic investigations and transaction monitoring, and tax calculations. Brody elaborated:
“Smart contract testing is already available through blockchain.ey.com, tax services are available now as well through EY’s tax service, and blockchain explorer visualization will go live later this year in a public beta as well.”
In addition to KPMG’s Chain Fusion and EY’s Blockchain Analyzer, both PricewaterhouseCoopers and Deloitte have data analytics solutions. PwC rolled out its Halo tool last year, which gathers data from crypto transactions and balances from blockchains to help institutions with audits. In October 2019, Deloitte integrated QEDIT’s zero-knowledge proof protocol into its blockchain platform. Known as Eduscrypt, this allows the platform to maintain the privacy of sensitive data collected from its institutional clients, like the Bank of Ireland.
Not just a big boys game
Although the Big Four firms have been ramping up their crypto and digital asset management tools to accommodate institutional growth, smaller companies continue to play a prominent role. Mike Belshe, a co-founder and the CEO of digital asset trust company BitGo — which claims to handle 20% of all Bitcoin transactions and most recently introduced a full-service institutional trading platform — told Cointelegraph that the firm’s offerings have enabled the Big Four to enter the digital asset market:
“BitGo’s strength in the digital asset space is precisely why large traditional firms are entering this market. We work with many of these firms globally and BitGo’s technology is powering their ability to start offering digital asset products.”
While it may be difficult to determine which solutions will reign supreme, it’s clear that institutional investors and fintech companies now require solutions to help manage their crypto and digital assets. New offerings that leverage data analytics may become more popular over time if proven to be effective.
Whatever the case may be, EY’s Brody pointed out that today, many financial institutions think of themselves as technology companies with a bank attached, noting that management solutions are extremely important:
“Keeping control of the assets and avoiding misuse of the assets is probably at the top of a (long) list of things that these organizations are exploring. Despite those fears, we’re seeing a big increase in careful consideration of this space by big financial institutions, and they’re looking for ways to add product to their portfolios and to manage thoughtfully the risks attached.”