The role of traditional finance in crypto in 2022
The once absolute boundaries between cryptocurrency and traditional finance have been blurred by the entry of institutional organisations into cryptocurrency in the last few years.
JP Morgan, Goldman Sachs, Fidelity, Black Rock and Morgan Stanley are among the old guard of finance that have awakened to the possibilities of bitcoin, while global companies such as MicroStrategy and Tesla remain heavily invested.
Banks are now invested in Bitcoin. So are hedge funds, sovereign wealth funds and nation-states. But there’s also the retail side of this general shift, which includes brands such as Adidas and Nike entering the NFT space and making known its intentions to play in the metaverse.
Cumulatively, this institutional adoption of cryptocurrency is being given the space that it’s been lacking since inception: the credibility to be taken seriously as a viable alternative to fiat money.
“Major banks are starting to figure out how to incorporate cryptocurrency into their services,” says Michael Kourtis, Liquidity Lead at Luno. He uses the example of US Bank, which announced in October its plans for a cryptocurrency custody service for fund managers. Other banks are providing their clients exposure to cryptocurrencies through managed investment funds. “More institutional products are being introduced to meet demand,” notes Kourtis. “There’s a gradual but definite conversion of traditional players as they become increasingly crypto-centric.”
Traditional finance meets Bitcoin
The listing of Bitcoin exchange-traded funds (ETFs), particularly futures-based ETFs, on exchanges across the world has served as the shallow end of the pool for fund managers that weren’t quite ready to dive straight in. “It has allowed these traditional institutions to get involved in cryptocurrency in a regulated way, without having to hold the underlying asset,” Kourtis says.
Marius Reitz, General Manager for Africa at Luno, says this trend of institutional adoption may continue into next year. “We may see more banks introducing cryptocurrency solutions,” he says. “The next development may be retirement annuities, life insurance schemes and the like entering the cryptocurrency investment space,” Reitz says, “but regulation continues to be a hurdle.”
The ongoing conversations between regulators and market makers in cryptocurrency should soon lead to a regulatory environment favourable to asset managers wanting to dip their toes into the space, explains Reitz, referring in particular to the regulatory environments in South Africa and the rest of Africa, which are yet to see the listing of bitcoin ETFs and other similar products. “Many of these companies are currently working on cryptocurrency products and will be ready to move the moment regulation falls into place,” he says. “And when these products are listed on, say, the Johannesburg Stock Exchange (JSE), it will be a watershed moment,” Reitz says.
Crypto adoption continues
Recent data by Chainalysis shows that cryptocurrency adoption globally has increased by more than 800% in 2021, driven in part by peer-to-peer platforms such as the Luno platform. This is especially the case in countries across Africa.
Kourtis points out that two billion people globally are unbanked. As a result, many people feel that the current financial system isn’t meeting their needs. “Interest rates are at an all-time low in many regions and inflation is on the rise, which has led to people looking for other investment options that will provide them with real returns,” he says – cryptocurrency being one of them.
Formal structures and partnerships between financial advisory firms will further facilitate this adoption by the general populace, says Reitz.
The road to cryptocurrency mass adoption is a two-way street. Cryptocurrency companies are increasingly taking up advertising space on billboards, in sports stadiums and the general media; retail space that was previously the domain of traditional brands and financial institutions. This, along with traditional finance entering the cryptosphere, has brought about normal conversations regarding bitcoin and other cryptocurrencies around the dinner table, and therein lies credibility.
“Many people use one banking app as their entry into investing, and they tend to do this through a trusted adviser. When regulation enables asset managers to invest in cryptocurrencies, and advisers to advise clients on how to invest in cryptocurrency, it will open the space to a large part of the market that has hitherto been denied access,” Reitz says.