Is the Asset Management industry poised to embrace crypto assets?

Setting the scene

To say that the subject of crypto assets is a “polarising topic” is an understatement. On one side stand those who claim the level of volatility is unacceptable, who decry the “absence” of an investment rationale, who fear the threat to climate change or the terrorism financing risk (or more recently, how crypto assets could allow some to circumvent financial sanctions) and use these as practical expedients to dismiss the topic. Some would argue that this side of the critics includes organisations or supranational bodies whose sovereignty, financial rent or relevance might theoretically be put at risk by the emergence of a decentralised and disintermediated crypto assets based financial system. On the other hand, stand those who emphasise the inherent benefits of crypto assets such as accessibility, inclusivity, efficiency and their role as catalysts for economic transformation.

In the middle of this battle of public opinions stand national and supranational regulators concerned about client protection and financial market stability while also being conscious of the role of crypto assets for the future competitiveness of their financial sector. Does this put them between a rock and a hard place? While it would be simplistic to propose which side is right or wrong, the market test occurring now is an interesting proxy towards understanding what is really happening and where we are headed.

Market snapshot

In order to assess a realistic view of the current situation and propose a potential outlook, it is essential to consult the current market figures. With a global market capitalisation of $2Tn¹, 300M² users, and more than 1,300 deals closed last year for $25Bn³, with in excess of $100Bn⁴ locked in DeFI protocols, a multi-trillion opportunity in the metaverse and not a single day without an established financial player announcing plans in the space, crypto assets seem to have crossed the mark to become a lasting phenomenon that could structurally impact the global economy.

Crypto assets as a new asset class

This being said, what’s the objective of having crypto assets as a new asset class, and what will its potential bring in the broader Asset Management industry?

Driven by this question, in February 2022 PwC Luxembourg released the “Crypto assets: Paradigm shift or short-term trend?”⁵ report, a joint initiative with the LHoFT⁶ and the active support of ALFI⁷. It looks into the growth drivers, as well as the opportunities and challenges, in order to help Luxembourg market participants form their decisions on how to approach crypto assets. The report is based on a survey performed in Q4 2021 with more than 120 respondents based in Luxembourg.

Key learning from PwC’s crypto-asset management report

Potential and readiness

Our results suggest a mix of enthusiasm and hesitation around crypto assets within Luxembourg’s financial services landscape. On the one hand, 18% of respondents already consider crypto assets as a strategic priority for their business, while 43% expect them to become a strategic priority in the coming two years. Additionally, 39% see some potential on crypto assets from an investment strategy standpoint, while 28% see high potential. On the other hand, a significant portion of respondents remain hesitant, with 39% having no real plans to engage in crypto-asset activities for the time being.

While the level of maturity varies greatly across surveyed entities, a majority of respondents (61%) said they are embarking or planning to embark on their crypto journey – either assessing, developing or already providing crypto-asset products or services. That said, 22% are still assessing the opportunity, while 39% have no plan to engage in the asset class. From a prospective view, a strong majority (88%) of respondents expect crypto assets to impact their business with close to 30% of them expecting a significant impact. To bring further perspectives on the current market potential, it should be noted that professionally managed crypto assets represent less than 3% of the total market capitalisation as of today.

Attractiveness

When asked about the most attractive crypto-asset features from an Asset Management perspective, respondents mainly agreed on its innate diversification potential, with 77% of them highlighting it as the most valuable attribute. Other attributes such as the asset class’s inflation hedging properties and the risk-adjusted return potential have also been recognised by 38% and 23% of respondents, respectively.

Motivations

Perhaps unsurprisingly, 70% of respondents affirmed that client demand satisfaction is the main driver behind the development of crypto-asset products. That demand stands, however, at a variable level of importance depending on respondents’ sectors. Other main reasons to develop crypto-asset products include to stay at the forefront of financial innovation (45%) and to build a competitive edge (31%).

Product roadmap

In order to meet clients demand, our results suggest that the focus should be on direct/indirect exposures, custody services and access to more advanced crypto assets products or services like DeFI, NFTs or stablecoins.

Outlook

While the structural elements for a future crypto-asset management industry are already established, further regulatory developments will be key in making market participants more comfortable with the topic. In the European Union (EU), we can expect the upcoming MiCA regulation, which aims to level the playing field across crypto-asset issuers and service providers and bring them in line with traditional financial players, to materialise regulations on crypto-asset management further. The legislative process is ongoing and the implementation of the regulation is expected in the second part of 2023.

In the US, the situation was less clear until it materialised into something more concrete in early March, when President Biden signed the expected executive order on digital assets. This development is an important

step, as it sets the mood for how the US wants to handle crypto moving forward, and also – and perhaps more importantly – because it’s the first time a national policy is outlined in a whole-of-government approach with a precise agenda and due dates.

Both events are of critical importance for the entire crypto-asset ecosystem and, assuming they indeed commit to support financial innovation, will play a structural role in the growth of a sound crypto-asset management industry.

¹ coinmarketcap.com, data as of March 2022
² crypto.com, data as of March 2022
³ State Of Blockchain 2021 Report, CB Insight
⁴ Defillama and DefiPulse, data as of March 2022
⁵ www.pwc.lu/en/blockchain-and-crypto-assets/cryptoassets-2022.html
⁶ Luxembourg house of Financial Technology
⁷ Association of the Luxembourg Fund Industry

Thomas Campione, Blockchain and Crypto assets Leader of PwC Luxembourg