​Since 2020, the adoption of cryptoassets has increased significantly and shows no signs of slowing down. In addition to institutional investors, who have embraced cryptoassets as an investible alternative asset class, traditional financial institutions are now beginning to explore ways to integrate cryptoasset-related services alongside their existing business lines. KPMG in Canada, alongside the Canadian Association of Alternative Strategies & Assets (CAASA), conducted a survey to gain insight into the factors leading to this increased adoption.

As the crypto industry matures, new trends emerge

Initially driven by retail demand, the lack of maturity among early crypto service providers made it challenging for institutions to participate in the market. Now, with institutional demand growing, the crypto market infrastructure increasingly resembles the traditional financial ecosystem. Many crypto-native organizations have matured significantly and industry players like prime brokerages, custodians, asset managers and retail investors are now advising their wealth management clients to buy cryptoassets directly.

One of the emerging trends is the development of institutional decentralized finance (DeFi), which is gaining traction with blockchain-based decentralized lending protocols. In addition to letting users lend and borrow cryptoassets, these protocols also support anti-money laundering (AML) and know your customer (KYC) regulations, which help institutions ensure that participants in the network are all known and have undergone the proper AML and KYC checks. This maturation of technology and continued innovation has led to steady growth in interest from investors and financial institutions. Firms want to stay competitive, and as adoption among fintechs grows, traditional firms are starting to look for opportunities to offer similar services.

The perceptions paving the way for the future of cryptoassets

Institutional investors reported relatively balanced perceptions of cryptoassets as an investible asset class, with the high potential upside (64%) and crypto's potential as an innovative technology play (54%) cited as the most significant factors affecting their view. In contrast, financial services respondents tended to have more reserved perceptions of cryptoassets. A key driver for these perceptions was the Canadian regulatory environment. Given that Canada was the first country to allow cryptoasset exchange-traded funds (ETFs), this was a surprising result.

Out of all institutional investor respondents, 32% reported that they have made an allocation to cryptoassets. Most of these allocations were relatively small: 71% reported allocating less than 2% of their portfolio to cryptoassets. The most common way to gain exposure (51%) was indirect, through regulated products such as ETFs and close-ended trusts. Other approaches to gain exposure to cryptoassets included public equities (36%), direct ownership (29%), and limited partnership through venture capital or hedge funds (29%).

With more clients wanting to invest in cryptoassets, we expect that institutional investors and financial service providers will continue to ask for more maturity in the space. Centralized exchanges and prime brokerages have already responded; we expect the next area to transform will be DeFi, as institutions look for ways to take advantage of the efficiencies that decentralized banking brings. This is reflected in the survey results: enabling DeFi services was the top beneficial factor motivating institutional investors to allocate to cryptoassets (57%), followed by offering uncorrelated returns (50%), being an innovative technology play (43%), and providing a hedge against inflation (21%).

The survey also revealed several different drivers for adoption for financial services, including leadership buy-in (57%), improved due diligence and research (57%), and institutional adoption (36%). We also see these different drivers for adoption and benefits reflected in the accelerating pace of adoption: 57% of respondents said they are moving faster than they were in 2020. In addition, most respondents (69%) said they have made plans to develop their cryptoasset strategies and offer more services in the space.

Increased maturity leads to greater competition

Cryptoassets and the Web 3.0 are often compared to the internet, and with good reason: think about those organizations that did not take their business online. How many survive today? Crypto is growing at an unprecedented pace, the efficiencies it brings will continue to attract more market share. With more than two-thirds of financial service providers already developing strategies and go-to-market initiatives, the cryptoasset space is poised to become even more competitive.

Are you prepared for the cryptoasset future? It's time to understand how crypto will impact your business, and we're ready to help you from strategy to implementation. Contact our team to learn more.

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