In March 2020, the COVID-19 pandemic led to a virtual asset ‘flash crash’. However, while traditional stocks continued to suffer severe volatility, virtual asset markets recovered within just a few weeks. This was a proof point for VASPs, as it showed their resilience to rapid market movements.

In fact, just a few months later, we saw major announcements with regards to the institutionalization of the industry with JP Morgan US announcing it will bank virtual asset exchanges Coinbase and Gemini, and the Hong Kong Securities & Futures Commission (SFC) issuing its first in principle virtual asset trading licenses to OSL. These are signs of a new era where VASPs become part of the traditional FS ecosystem.

In the next 1-2 years, we expect to see more VASPs follow the institutionalization route. New organizations will innovate with new business models and fast product development. Meanwhile, traditional FS institutions will add to the competition, setting up their own virtual asset services. An example is Standard Chartered’s venture arm, SC Ventures, which offers virtual asset custody out of Singapore. This is amplified by the news of the development of new digital currencies across many jurisdictions, particularly the Central Bank Digital Currency (CBDC) projects in various stages of maturity around the globe. In fact, some governments have also announced their plans to take part, with China’s digital Yuan a prominent example.

There are multiple other trends to watch out for – such as tokens that allow for fractional ownership of less liquid assets (i.e. real estate, carbon, IP or art), driving liquidity premiums and diversification. Other trends include additional services such as professional brokerage services and investment banks dedicated to virtual assets.

In summary

This report outlined many of the operational steps required to make VASPs mature enough for institutionalization. For VASPs to succeed, customer engagement, regulatory compliance, clearing and settlement, custody and governance are all vital to optimize. At KPMG, we are excited to follow this development and support our clients on their institutionalization journey.

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Laszlo Peter
KPMG Australia

Juanita Brockdorff
KPMG in Malta

Andrew Schofield
KPMG in the Cayman Islands

Masatake Toyota
KPMG in Japan

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