Virtual assets moving into the mainstream
2020 was a solid year for blockchain, despite total funding dropping to US$2.8 billion. Blockchain-based companies continued to grow, as evidenced by new unicorn Chainalysis, which raised US$100 million in November. The virtual asset space was particularly active, with service providers continuing to emerge and banks and other well-known asset providers increasingly offering investment portfolios, ETFs and other products.
Players in the crypto asset ecosystem increasing
The virtual asset industry grew significantly in 2020, not only through the creation of new products and asset classes, but also through the participation of a broader range of market players not weighed down by legacy processes and infrastructure. These players introduced new channels and technologies able to address the needs of more sophisticated investors.
We have started to see clear principles and expectations emerging for the virtual asset industry. These frameworks are coming into being not only to safeguard investors, but also to create the resemblance of regulatory structures of financial services providers. Obviously, virtual asset service providers will have to bring this increased level of scrutiny and remove any uncertainty around challenges of compliance or enforcement in order to meet the needs of more sophisticated and in particular institutional investors.
Regulatory environment changing rapidly
In 2020, Hong Kong (SAR) and Singapore developed regulatory frameworks and licensing regimes for virtual asset providers, while the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) updated its regulatory framework for virtual assets.1 Super-regulatory bodies like International Organization of Securities Commissions (IOSCO) and Financial Action Task Force (FATF) also continued to provide recommendations on regulatory structures. These kinds of initiatives are essential for bringing in good practices to further operationalize the crypto and virtual asset industry.
Stablecoins shifting options for cross border payments
In 2020, stablecoins continued to gain attention, including the JPMorgan Coin, which went live in H2’20. The growing acceptance of stablecoins and their increasing regulation in some jurisdictions will likely drive future opportunities in the cross-border payments space, for users, global companies and multinational banks with the ability to facilitate transfers more economically.
Governments investigating digital currencies
As China forged ahead with real-world testing of its central bank digital currency, other countries began to evaluate their options, including a group of central banks (e.g., Federal Reserve, European Central Bank, Bank of England) that together set out a framework and requirements for offering central bank digital currencies.2
What to watch for in 2021
- The development and evolution of central bank digital currencies
- The rise of institutional investors in the virtual asset space
- Increasing investment in operations-focused (e.g., compliance, investigations) solutions
- The strengthening of compliance practices, risk management and operational controls
- Issuance of stablecoins by mainstream brands