Does crypto have a mainstream future?

What is the institutional trajectory for crypto today?

It’s an important question to ask. The true potential of cryptocurrencies will only materialise when they spread beyond the retail market and become widely adopted by institutions.

Crypto, of course, has its roots in the global financial crisis in 2009, which spawned the birth of the electronic peer-to-peer cash system that has become bitcoin.

Despite twists and turns of boom and bust, a whole new industry has evolved, achieving a scale and value that’s now too significant to remain on the financial fringes. No longer a speculative fad, crypto is fast becoming a mainstream form of investment and finance.

Bitcoin has 41% of the industry’s total market value, with Tether and Ethereum also popular among traders. Market cap for all cryptocurrencies has grown from about $19 billion in January 2017 to an eyewatering $2.2 trillion in January 2022.

Despite this, legislative attitudes and regulation lag behind. Most countries have still not yet created concrete regulatory approaches on crypto, with some nations `–China and India among them – continuing to limit or ban its use altogether.

Nonetheless, 55 out of the top 100 global banks by assets under management (AUM) now have some form of exposure to crypto. This is according to research by Blockdata, the blockchain market intelligence consultancy.

One of these is none other than the European Investment Bank. In a landmark moment in April 2021, it issued its first-ever €100m crypto bond.

Europe is clearly preparing the ground for wider institutional adoption of crypto. It has started to prepare a legal framework via the Markets in Crypto-assets Regulation (MiCA), expected to come into effect in 2023. Several proposals are for the creation of a structured market that lines up to those of more traditional financial instruments of debt.

The US is moving fast in progress in developing federal cryptocurrency legislation. It's also already leading the way with institutional adoption of crypto, with Wall Street increasing its crypto offerings in wealth management, trading and even investment banking.

Goldman Sachs this year began trading its first over-the-counter Bitcoin options.

In April, Circle Internet Financial, issuer of the USDC stablecoin, raised $400 million in a funding round. It included investments from BlackRock (the world's largest asset manager), Fidelity, Marshall Wace LLP and Fin Capital.

Traditional banks have also been exploring the technology in recognition of the way the wind is blowing.

Large financial institutions, from investment banks to stock exchanges to central banks, are all beginning to generate their own blockchain-based solutions. Many are building crypto custody platforms.

The tamper-proof, decentralized, immutable nature of the blockchain means it could be a driver of reduced costs and a vehicle for streamlining a swathe of traditional banking services. These include payments, asset trading, securities issuance, retail banking, and clearing and settlements.

As an indication of crypto’s versatility, you only need look at the success of Ukraine’s government. It has collected donations of more than $100 million in crypto to support its defence efforts. This is an achievement that would have challenging through traditional means.

In November 2021, the Office of the Comptroller of the Currency (OCC) stated that US banks and savings associations could provide crypto custody services for customers. The measure includes holding unique cryptographic keys associated with accessing private wallets.

(Crypto custody is a term used to describe the process of securing crypto assets from theft in a similar way to traditional custodial parties hired as safeguards of your money, be it cash, securities or gold bars.)

This has opened the door for custody giants such as BNY Mellon, Citibank and Fidelity to enter the crypto custody market.

and Fidelity to enter the crypto custody market. While there still remain many unanswered questions about the speed of crypto’s scale and adoption, the direction of travel is clear. Regulation remains a barrier, but it’s on its way. The Biden White House released its first-ever framework in September on crypto regulation in the US. It covers ways in which the financial services industry should evolve to make borderless transactions easier and prevent fraud in the digital asset space.

Crypto may not yet be global digital collateral. But, as it matures and moves towards wider institutional adoption, its place looks increasingly certain within the evolving global financial ecosystem.