Digital assets move mainstream

According to a recent survey conducted jointly by Citi and Global Custodian, the financial services industry recognises the potential of digital assets to capture a significant portion of trading activity over the next few years, though many individual firms have yet to refine their own strategies for engagement.
By Joe Parsons

Sponsored by Citi

Some 63% of survey participants indicated they were in the process of developing a strategy to invest in or support digital assets, while 28% said they already have a clear strategy in this regard. 

Based on more than 220 validated responses from along the investment chain (see figure 1), the survey results show an overwhelming expectation (91%) that digital assets – essentially a basket of different asset classes enabled by a common technology, cryptographically secured on a distributed ledger – will become dominant over time. 

Almost 50% of survey respondents overall expect investor interest in digital assets and related services to grow rapidly. This figure is slightly higher among broker dealers and investment banks (51%). Perhaps reflecting regulatory constraints in relation to their own institutional clients, this expectation of rapid take-up falls to 43% among mainstream asset managers, though 38% say they are already actively participating in the market and 50% expect to participate in live use cases within two years. Firms claiming already to be actively participating in the digital asset market average 47% across the survey as a whole.

When it comes to constraints on engagement, some 34% of asset managers in the survey cite regulatory concerns. For broker dealers, by contrast, the most significant barrier is seen as lack of secure market infrastructure. Interestingly, when asked about the perceived advantages of digital assets, more respondents cited greater efficiency in the investment and trading process (30%) than the potential for higher returns (25%) – which may well be the main attraction for retail investors in digital assets (see figure 2).

Digital securities on regulated markets and digital alternative assets such as real estate and private equity were, on average, regarded as most likely to attract direct interest from institutional investors. In that context, custody remains a crucial element in the investment process, even with a blurring of the sequential transaction chain.

Custody of digital assets for institutional clients is likely to pit traditional service providers against a range of non-bank FinTechs with competition yet to play out. In a digital context, custody involves managing and storing the private keys that control the assets on behalf of the owner. Particularly for institutional investors focused on asset safety, the addition of digital assets to a portfolio should not, in principle, be outside the remit of traditional service providers. 

The survey found that while expertise in traditional custody was seen by just under a quarter of respondents as the most important consideration in appointing an external custodian for digital assets, 47% prioritised experience in digital assets and networks as the key factor (see figure 3).Perhaps of some comfort to traditional custodians, 20% of asset managers participating in the survey pointed to an existing commercial relationship as of primary importance in their awarding of a digital custody mandate.

The full report on the survey findings may be downloaded from the Global Custodian website.