Institutions will continue to back blockchain
by Norman Wooding, founder and CEO of SCRYPT Digital
Despite much of the media presenting 2022 as a failure for crypto with tanking asset prices and large companies going to the wall – VC investment into blockchain in 2022 increased by around six billion USD.
Approximately 36.1 billion USD was raised in 2022, compared to the 30.3 billion USD raised in 2021.
While it’s easy for non-professional or retail investors to look at last year and feel depressed, for an institution invested in blockchain, the events of 2022 are little more than growing pains.
It’s almost impossible to find a financial institution that’s not involved in blockchain or crypto in some way – whether it be investments into digital assets or the underlying blockchain technology. A survey in Campden Wealth’s Europe Family Office Report 2022 found that one-in-three European family offices have an investment in blockchain and one in five in the metaverse.
This is because family offices and other institutional investors understand the long-term potential of blockchain technology and tokenisation. Many of these applications are well known, but perhaps not fully understood by those outside of the financial world that it looks to revolutionise.
The fact is, most of these institutions have first-hand experience working with the asset classes and/or services that are set to be revolutionised or made more efficient by blockchain technology. They understand the size of the opportunity. I won’t go into too much depth about blockchain applications as they have been spoken about in depth for years. But a few of the bigger opportunities that investors have their eyes on are:
Tokenisation of stocks, commodities, and bonds: As well as improved settlement times, tokenisation can also ensure faster liquidity and transparency within these markets. Investors know this is coming and are looking out for the businesses that are building the appropriate technology.
NFTs: Setting aside the NFT ‘art’ market for a moment, there are multiple business use cases for NFTs, such as the sale of event tickets, identity and access management, certification, rights to musical content and more. One way or another, we all interact with content or services that could be expedited and made much more efficient by using NFTs.
DAOs: While this is likely to be further into the future, decentralised autonomous organisations have the potential to replace many business models where efficiency, fairness and transparency can be coded in. Not having a central authority but creating a structure where everyone benefits from the long-term success of a project could be ground-breaking.
For those not watching, these are very much past the idea stages and are being implemented today. For example, the Swiss private bank, Cité Gestion, started using Taurus technology to tokenize its own shares in January 2023.
Some of the biggest early adopters are in emerging markets – particularly Africa. Due to political repression and inflation, many people have turned to digital finance to store and transact value. The latest crypto owner’s data from Triple A estimated there are 53 million cryptocurrency owners in Africa – 16.5% of the global total. Where there’s a growing need and a growing number of possible crypto solutions, it’s impossible for institutions to ignore.
Institutions aren’t phased by the short-term volatility of assets or dips in valuations as they take a much longer-term view of multiple years. Even after the FTX scandal, many institutions remain steadfast in their belief in blockchain technology. David Rubenstein, Co-founder of the Carlyle Group said when speaking to Private Equity News “Despite the cryptocurrency-related challenges of today, things related to blockchain technology are likely to see a fair amount of growth”.
And quite a lot of growth it seems. One report from Future Market Insights projected that the Web 3.0 Blockchain market will grow to an estimated valuation of 116.51 billion USD by 2033, with a strong CAGR of 44.9% over 2023-2033. The market is currently valued at 2.86 billion USD.
The crypto world has been forcibly thrust into a renewed need for maturity. The right questions around regulation and quality are finally being asked. Institutions through capital allocation and choice of providers will be the ones that ultimately decide which businesses and products make the cut.
While it hasn’t shaken beliefs, I hope the FTX crash has provided institutions with a much needed wake up call to increase due diligence processes. In an ideal world, extensive due diligence should have been carried out before Sam Bankman-Fried received $1.7 billion of institutional investment.
In the short term, this means a slowdown in investment for blockchain businesses while investors recover from the initial shock and work on their due diligence processes. In the medium/long term, this means the big businesses of tomorrow are more likely to be effective and trustworthy. Institutions know this, and they will continue to back blockchain, even if cautiously – because the alternative is missing out altogether.