Institutional Adoption: In It for the Tech or the Turn?

- It would be irresponsible to ignore the best-performing asset since it was born on January 3, 2009

- The industry still needs regulatory clarity on security vs. commodity status

-Tokenized MMFs is going to be the next killer app, after stablecoins

2024 will be remembered as the year when institutional investors pivoted towards crypto and started to imagine what the future financial infrastructure could look like. Bringing together representatives from three large institutions – BlackRock, Fidelity Investments and Franklin Templeton – provided some indication of just how far they have come and how they are fostering the adoption of cryptocurrencies.

Prior to the launch of spot ETFs in January last year, BlackRock managed no digital assets. As of yesterday, it managed $61 billion of Bitcoin, Ethereum and tokenized assets on behalf of clients, reported Joseph Chalom, Head of Strategic Ecosystem Partnerships at BlackRock.

“Most of these clients had no exposure to Bitcoin, Ethereum or any tokenized asset before they bought their first exchange-traded products (ETP),” he said. “We are not centralizing crypto. We are broadening exposure to investors, and we do it on their behalf with a better vehicle than they had access to.”

He argued that BlackRock is going into Bitcoin investment on behalf of its clients because it has a fiduciary duty to deliver the best possible outcome. “It would be irresponsible to ignore the best-performing asset since it was born on January 3, 2009,” he said. In December, BlackRock publicly advocated that a well-diversified portfolio should hold 1% to 2% Bitcoin.

One of the most overlooked and most important reasons underpinning the success of ETFs in 2024, according to Sandy Kaul, Head of Franklin Innovation Research, Strategies, and Technologies at Franklin Templeton, has been that many traditional firms are using digitally native service providers as part of their day-to-day operations.

“We are now moving to a wallet-based system, which is going to take time because the entire traditional financial industry has been built around the concept of accounts,” she said. “We will see many benefits, such as the ability to co-mingle assets and we will start to see assets become interoperable.”

Tom Jessop, President of Fidelity Brokerage, a division of Fidelity Investments, believes that investors will end up with a mix of products and hybrid market structures. “For most traditional investors, a crypto ETP is a good way to get exposure, if we manage them through existing service providers and accounts with known processes around custody, settlement, etc,” he said. “We want customers to buy crypto directly, but a large number are just happy to place a trade the same way they placed a trade for another ETP.”

On the tokenization of money market funds (MMFs), Kaul likened the development to stablecoins. “If you think about stablecoins as the first killer app, interconnectivity and instant redeemability between stablecoins and tokenized MMFs is next, which will unlockuse cases in areas that no one would expect,” she said. “It’s so exciting because the utility is going to rapidly expand beyond the crypto ecosystem.”

In terms of future wishes, Kaul emphasized the need for clarity on what constitutes a security versus a commodity. Jessop called for quick legislative and regulatory action and a safe harbor so that the industry can move forward before the rules are finalized. Chalom advocated for the SEC to allow Ethereum staking.