Since the value of Bitcoin has recovered from its 2018 fall, the wider crypto sector has largely stabilized and, once again, become part of the mainstream investment mix for a growing number of investors and the financial institutions that serve them. Now, the first wave of crypto currencies – beginning with Bitcoin – are de-facto considered by users as “something of value”.
Similarly, distributed ledger technologies, which underpin Bitcoin and other crypto currencies, continue to disrupt financial markets and their infrastructure by getting rid of the messages currently used to synchronize all variables in a transactional chain. This will develop even faster in the coming years, with exchanges providing a real-time and atomic delivery-versus-payment process in addition to automating corporate actions.
In turn, this will lead to faster and cheaper transactions, reduced credit risk and an increase in the number of liquid assets. There will also be an explosion of asset classes; entities that are currently non-bankable will be tokenized and made tradable, thereby moving the industry towards a pure end-to-end digital experience concerning all types of assets. Long term, it is clear that crypto currencies are here to stay.
“Crypto currencies such as Bitcoin have significantly gained value – from below 500 BTC-USD in 2014 to around 10000 in 2020.”
The benefits of crypto are clear. What is holding back large-scale adoption?
A crypto asset is not a single asset class. Rather, it creates the opportunity to invent and introduce all kinds of new asset classes. At the same time, crypto assets also serve as a means for diversification of the total investment portfolio, as crypto currencies such as Bitcoin include a low correlation with more traditional asset classes.
Figure 2: Crypto currencies as Bitcoin with low correlation with traditional assets
Today, the combined value of crypto assets is still small relative to the whole financial system. The technology to integrate crypto assets is available and the finance services industry is expected to be the future frontrunners within blockchain technology, enabling the acceleration of tokenization of assets and making crypto currencies more attractive.
Figure 3: Global executives regard financial services industry most advanced in blockchain technology
One way to power the transformation to crypto assets is to provide investors, wealth managers, and financial institutions with more convenient, transparent, and simple solutions in order to accelerate their investment in crypto currencies.
What challenges come with switching to crypto assets? Given the discussion above, it is natural to question why uptake in crypto assets is not higher. The answer to this lies in the numerous technical complexities involved with adoption, coupled with concerns among investors and financial institutions.
An investor’s perspective It is difficult for an investor alone to assess potential partners and their technical solutions, the likes of which are often overly complex – with cryptography being a hard concept to grasp. To simplify matters, investors need to know if their partner has the skills to carry out crypto processing in a reliable manner. Looking further afield to the market, investors would also be wise to ask: how will new assets be managed once acquired? Where should they consolidate their positions? How can they understand their risk exposure?
A financial institution or wealth manager’s perspective From a financial institution or wealth manager’s perspective, the situation is much the same, albeit, following a different line of questioning: how can they ensure the best execution? How can they customize assets? How will they implement and integrate crypto assets into existing investment processes? And, most importantly, how should they tackle compliance and security?
As of now, the crypto market and any related technology is mature, but financial institutions and wealth managers need to further explore the possibilities on their own. They need access to integrated solutions so that they can spend more time improving client services – as opposed to building the necessary IT infrastructure from scratch.
“10% of global GDP to be stored on blockchain by 2027.”
World Economic Forum
Find out why digital assets have hit the wealth management mainstream
A clear path for crypto assets and blockchain solutions
Integrating crypto assets in a cheaper, and more efficient way – it is possible.
Introducing crypto assets and blockchain into an established product portfolio and technology stack can be cumbersome. How can we help our clients adopt several different solutions at once?
Integrated crypto and blockchain technology At Avaloq, our approach is to make your existing setup crypto ready in terms of products and processes instead of using a separate platform for each. This, in turn, makes it easier, faster, and more cost-effective for financial institutions and wealth managers to start offering crypto and blockchain-based solutions.
Industry-grade security In December 2018, we announced the launch of our groundbreaking crypto asset solution, created in partnership with crypto asset custody infrastructure specialist METACO. A fully integrated solution designed to provide financial institutions and wealth managers the room to manage client portfolios across all asset classes, including crypto currencies. And, in partnering with METACO, we are also providing our clients Hardware Security Modules with military grade security. This applies to storage of private keys and managing wallets, as well as native multi-signature functionalities for transactions.
Tokenization of assets At Avaloq, we aim to offer financial organizations the chance to tokenize non-bankable assets like real estate, collectables, or non-regulated funds. We see ‘smart contracts’ and Initial Coin Offerings as an avenue to develop new, innovative products, and we are working hard to enable our clients to trade tokens with connections to exchanges – a native offering within our financial software.
Continuous improvement of our solutions – for the near and long term
At Avaloq, we see a clear path towards developing crypto and blockchain technology for financial institutions and their clients. To get there, we’re working with AlgoTrader technology to connect crypto brokers and exchanges. That’s in addition to making room for crypto key custody integration – based on Metaco SILO – and more seamless functionalities that will allow for delivery of compliance solutions. We’re also developing crypto web banking and mobile app capabilities to improve our client crypto service offerings and blockchain interoperability. Helping financial institutions leverage all the opportunities crypto and blockchain technology have to offer.
Note: The content of this roadmap is for information only and is intended to outline the general product direction; accordingly, it should not be relied upon for the purpose of making purchasing decisions. The information provided is not a commitment, promise, or legal obligation to deliver any material, code or functionality.