Once dominated by young and smart private investors, the cryptocurrency market has recently been gaining interest from institutional investors and large fintech companies. For example, Grayscale Investments recently added 19,879 Bitcoin (BTC) to its Bitcoin Trust, bringing the total volume of the company's predominant cryptocurrency to nearly 400,000.
The investment firm further noted in a tweet on June 25 that it manages $ 4.1 billion in digital assets. It is also worth noting that the leading payment provider PayPal will soon include options for cryptocurrency.
While some individuals in the crypto community may cringe at the thought, recent findings from Big Four firm KPMG explain that institutionalization is now more necessary than ever to ensure that cryptocurrencies reach their full potential. A KPMG document entitled "Cryptocurrencies are here to stay" states:
"Institutionalization is the large-scale market participation by small and large entities within the global financial ecosystem, including banks, broker dealers, exchanges, payment providers, fintechs and service providers."
Arun Ghosh, the blockchain leader of KPMG in the United States, told Cointelegraph that after the peak of 2017, space has matured in crypto to such an extent that large asset managers are now looking for cryptocurrencies on their wallets. "We see both retail and institutional investors with crypto appear on their balance sheets," Ghosh said.
And while curiosity about institutions' crypto and digital assets has increased over the past year or so, the crypto market in particular has become of recent interest. The latest research from Fidelity Digital Assets confirms this idea, indicating that of the approximately 800 institutional investors surveyed in the United States and Europe, 36% are currently investing in digital assets. The findings also show that while only 27% of the 441 U.S. institutions surveyed are exposed to crypto, it's an increase of 22% from last year.
Paul Brody, the principle and global innovation leader at Ernst & Young, told Cointelegraph that markets are also seeing a repeat of the 2008 cycle, where large monetary stimulus has sparked a lot of interest in alternative assets that may be less prone to inflation:
"Compared to traditional financial markets, the offering and choice of offerings look small, but companies are getting better at solving the regulatory challenges associated with cryptocurrencies and marketing products that are not available in other markets . "
Brody went on to say that there are now far more choices than investor crypto, including asset-backed property-based tokens, fiat currencies and other commodities, along with a wider range of available services built in the decentralized financial ecosystem. "Combine even a small asset reallocation with a range of new offers and you have a recipe for significant growth in this sector from the existing base," Brody said.
As 2020 can prove to be a critical year for institutional interest in the crypto market, Big Four companies have ramped up their management offerings to accommodate their institutional clientele. Tools that use data analytics to address security, regulatory compliance, and privacy around crypto and digital assets are especially important to institutional investors and fintech companies.
For example, KPMG launched a cryptocurrency management platform called Chain Fusion. This comprehensive tool uses data analysis to streamline the ability of institutions and fintech companies to securely and correctly manage their crypto and digital assets in one place.
Sam Wyner, the director and co-lead of the crypto asset services team at KPMG, told Cointelegraph that Chain Fusion is specifically designed to solve data problems that traditional financial service providers are entering the crypto space with: “Data challenges are much more complex in the crypto and digital assets, since most organizations – be they custodians or exchanges – have a lot of systems and information. He added that "all of that data is interrelated in different ways, making it difficult to put that data together clearly and give meaning to it."
According to Wyner, Chain Fusion is a platform that creates one structured, consistent data model from different information sources. For example, Wyner said that a mass of data is generated when fintech companies or institutions conduct crypto or digital asset transactions:
“There may be fiat transactions that must go through multiple jurisdictions, or there may be some on-chain transactions. Transactions can also take place through different payment providers in different currencies. There is a lot of different information that contains important analyzes that traditional organizations need to operate safely and correctly in the crypto world. ”
It is important to point out that compliance with financial services regulations is data intensive and therefore requires analysis from different sources to ensure that all challenges are addressed. For example, Wyner said monitoring transactions with Know Your Customer and Anti-Money Laundering is something traditional organizations should pay close attention to when customers move assets in and out of their businesses. The report & # 39; Cracking Crypto Custody & # 39; from KPMG explains this further, saying:
"Even established financial institutions that already have mature AML and KYC compliance programs are challenged to improve their methodologies to address the unique considerations for cryptoassets and related data management challenges. Two of these challenges include the fundamental aspects of KYC and AML: determining the origin of customer assets and meeting transaction monitoring requirements. "
Ghosh of KPMG noted that one of the key aspects of Chain Fusion is the analytical decision framework. He also pointed out that regulatory compliance based on analysis has never been done before, but that it is now more necessary than ever to address institutional interest.
While the concept may be new, Big Four firm EY has also embraced data analysis to address challenges faced by institutions and fintech companies. According to Brody, the biggest hurdle for traditional financial organizations entering the crypto space is regulatory compliance. He explained that many of the company's large institutional clients are extremely cautious about being involved with digital assets, as a lot is at stake when something goes wrong.
Related: The Big Four Are Getting Ready To Become Crypto And Blockchain Auditors
In terms of analysis, Brody pointed out that EY's Blockchain Analyzer tool, previously only available to the company's audit teams, is now accessible to private customers. According to an April 2019 press release, the second-generation blockchain analysis tool uses data analysis to enable financial reporting, forensics and transaction monitoring and tax calculations. Brody explained:
"Smart contract testing is already available through blockchain.ey.com, tax administrations are now also available through EY's tax authorities, and blockchain explorer visualization will also go live in a public beta later this year."
In addition to KPMG & # 39; s Chain Fusion and EY & # 39; s Blockchain Analyzer, PricewaterhouseCoopers and Deloitte have data analysis solutions. PwC launched its Halo tool last year, which collects data from crypto transactions and blockchain balances to help institutions audit. In October 2019, Deloitte integrated QEDIT & # 39; s zero-knowledge proof protocol into its blockchain platform. Known as Eduscrypt, this allows the platform to maintain the privacy of sensitive data collected from its institutional clients, such as the Bank of Ireland.
While the Big Four companies have stepped up their crypto and digital asset management tools to enable institutional growth, smaller companies continue to play a prominent role. Mike Belshe, co-founder and CEO of Digital Asset Trust Company BitGo – which claims to process 20% of all Bitcoin transactions and recently introduced a full-service institutional trading platform – told Cointelegraph that the company's offering has enabled the Big Four to enter the digital asset market:
BitGo & # 39; s digital asset strength is exactly why large traditional companies are entering this market. We work with many of these companies worldwide, and BitGo's technology strengthens their ability to offer digital asset products. "
While it may be difficult to determine which solutions predominate, it is clear that institutional investors and fintech companies now need solutions to help manage their crypto and digital assets. New offers that use data analysis can become more popular over time if they prove to be effective.
Be that as it may, Brody from EY pointed out that many financial institutions today consider themselves to be technology companies with a bank, and that management solutions are extremely important:
“Controlling the assets and preventing misuse of the assets is probably at the top of a (long) list of things that these organizations are investigating. Despite those fears, we are seeing a big increase in the careful consideration of this space by major financial institutions, and they are looking for ways to add products to their portfolios and carefully manage the risks associated with them. "