Institutional Investors Eye Digital Assets
Data indicate that institutional investors want to increase their allocations to digital assets but questions remain about custody and the risks associated with holding the assets directly
The digital assets space is becoming more institutionalized and investors are watching closely. When the Trump administration took over, they made a clear decision to embrace digital assets throughout their policy platforms. Chairman Atkins at the SEC has also given his support for digital assets in public comments. That shift has been backed up by regulatory support in Congress through the passage of the GENIUS Act as well as work on other bills that would allow for the creation of digital assets market infrastructure that replicates more of what is available to investors in traditional finance.
For digital asset evangelists, these are all moves in the right direction. However, we are still in early innings when it comes to building that infrastructure as well as the kind of support that fiduciary investors need. According to the latest Digital Asset Survey from State Street, investors reported being interested in increasing their allocations to digital assets but were taking a cautious approach to adoption until the new regulatory shifts have time to take hold.
60% of respondents said they were planning to steadily increase allocations over the next two years.
Custody comes into focus
Institutional respondents to the Digital Asset Survey said part of what was holding back adoption are custody issues. Institutions reported a desire to handle custody through existing traditional banking relationships. However, many traditional banks don’t have digital assets custody set up yet in part because they were boxed out by regulations that have since been changed.
BNY Mellon is the first to respond to this change. BNY now offers custody of digital assets and has created a broader platform that also has fund services and can enable the use of stablecoins for payments. BNY already manages custody of $55.8 trillion in assets and clears approximately $2 trillion per day. Industry analysts expect that having BNY move into the digital asset space will increase support among institutions given their relationships.
BNY is already offering custody services for some funds – a move which could provide a track record for investors to look at as they consider their own digital assets strategy.
BNY provides custody services for BlackRock’s BUIDL – USD Institutional Digital Liquidity Fund and at the end of last year announced the launch of BNY Dreyfus Stablecoin Reserves Fund. These two funds are designed to facilitate institutional adoption and use of digital assets.
The stablecoin market is expected to grow significantly over the next three to five years, enabled by the GENIUS Act, which provides a regulatory framework for US stablecoin issuers, as well as increasing client adoption. Analysis suggests that the stablecoin market could reach $1.5 trillion by 2030.
BNY is also reportedly considering accepting tokenized deposits, a move which would enable treasury services on the blockchain. This would move the bank closer to offering more traditional financial services as digital asset services – a move which institutional investors have said is important for helping them maintain their fiduciary requirements.
ETFs pick up steam
The market structure for digital assets becomes more institutional, early adopters are using ETFs as a way to increase their exposure to digital assets. There are now 25 ETFs that offer access to Bitcoin as well as a growing pool of ETFs that offer access to other cryptocurrencies, tokens and other parts of the digital assets universe. ETFs can offer investors access to these asset classes without having to manage through the custody issues and other regulatory gray areas that come with holding digital assets directly.
Robert Mitchnick, Head of Digital Assets, BlackRock says that since the ETFs have launched he’s seen a broad range of institutional investor interest. “A lot of people are investing personally first and then you start to see awareness move upward,” he says. “So there are some institutions that are already invested, others have been monitoring the space for a long time and will probably be next. And, there are others who haven’t considered it yet but having a variety of structures in place makes that conversation easier. Most investors are comfortable with what an ETF is.”
Mitchnick expects that as crypto ETFs continue to build market share institutional allocators will want to learn more about the asset class. He notes that BlackRock is also working with the advisor community which has been hesitant to add these products to their platforms given the higher levels of volatility that come with cryptocurrency. Many wirehouses also require ETFs to reach a certain asset size as well as a three or five year track record before they are widely available on platforms.
“These firms have specific timelines that they adhere to but we have seen some look at ways of accelerating their evaluation timeline,” Mitchnick says. “But there is also regulatory risk. Regulators have indicated that they would put significant scrutiny on any activities wealth management platforms do in the crypto space. So everyone is very cognizant of that and it does drive how they operate when it comes to crypto products.”
For investors, Mitchnick says it’s important to understand and take a view on the role of cryptocurrency within a portfolio. Using Bitcoin as an example, he says that if you look at it on its own as a currency it’s got a lot of novel risks because of its volatility, newness and unique way of trading. However, when considered through the lens of being a small, non correlated allocation it can be seen as another return driver in a portfolio. A relatively small allocation through ETFs or made directly can help limit risk and allow for an investment without meaningfully changing overall portfolio volatility.
Leading institutional investors, academics, and industry practitioners will be coming together to discuss the future of digital assets and their adoption into institutional portfolios at the upcoming AIF Global Annual Investors’ Meeting to be held in New York, New York on January 13-14.