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KPMG Report: Institutionalization of Crypto Necessary

According to a KPMG Report published last week, digital assets like Bitcoin are not truly currencies yet but a new world of finance is emerging in which transacting in crypto-assets may become standard procedure.

The comprehensive report in the first instance offers certain use cases for cryptocurrencies.  It claims that Bitcoin is on its way to becoming an investible asset class.  However, the contention is that Bitcoin is not a store of value today.  That point will resonate all the more with those who are following cryptocurrency given the billions that have been wiped off crypto valuations over the last few days with Bitcoin currently testing the $5000 level at the time of writing.

Notwithstanding that, KPMG are of the belief that on the whole, Bitcoin is not inherently volatile due in part to the fact that the digital currency has a fixed supply which is algorithimically secured.  It offers the opinion that Bitcoin has potential as a future store of value.  Furthermore, a globally accessible, decentralized store of value could have a stabilizing effect on a country experiencing hyper-inflation such as Argentina.

It identifies Ethereum as a platform for the launch of Initial Coin Offerings (ICO’s).  On the one hand, it warns that the ICO environment has suffered from fraudulent activity and a lack of governance.  On the other hand, KPMG suggest that ICO’s are innovative, facilitating a more efficient flow of capital from a much broader pool of investors.

It cites the example of a Litecoin transaction to the equivalent value of $99 million which was achieved with a transaction cost equal to $1.  Whilst transaction times are slow by comparison with Visa/Mastercard, KPMG identify the potential for cost savings and recognizes the ability of anyone worldwide to send such a transfer without the need for an intermediary or third party.

Furthermore, the report acknowledges that the ability to tokenize traditional and emerging assets using cryptocurrency has the potential to reduce friction and costs associated with the issuance, transfer and management of assets such as securities, commodities and real estate.  Additionally, tokenization may assist in increasing transparency throughout the lifecycle of an asset and increase liquidity.

Of all the use cases for digital assets, KPMG believes that a tokenized economy could be the aspect that has the most impact.  Whilst token generation is easily achieved, not every token can be trusted.  Trust will need to be driven by effective regulation and a functional consensus mechanism built into the underlying tech behind the token offering.  The report also challenges those that consider tokenization to examine whether it’s appropriate for the asset in question, that to do so solves an actual problem and meets market needs.  With the increased interest in blockchain technology generally over the past year, we have seen the tech associated with projects and industries where there is often no tangible use case.

The report propounds that as tokenization evolves, use cases emerge and achieve adoption and the general ecosystem will develop to facilitate greater institutionalization.  The main take away from the report revolves around institutionalization.  The report is titled “Institutionalization of Crypto-assets” and it comes to the conclusion that in order for crypto-assets to truly realize their potential, institutionalization is needed.  The assertion made is that institutionalization is the logical next step for crypto in order to create trust and scale.

The report states:

“Institutionalization is the at-scale participation in the crypto market of banks, broker dealers, exchanges, payment providers, fintechs, and other entities in the global financial services ecosystem.  We believe this is a necessary next step for crypto to create trust and scale.”

There has been a sustained view amongst many in the crypto-space that institutional investment in crypto will herald in a change of fortune for the crypto-market which has been in a bear market for the entirety of 2018 thus far.  There have been many indicators of moves towards institutionalization through investment in ancillary services such as custodian solutions, tax compliance services and moves towards self regulation within the industry in order to standardize and raise the bar in terms of the quality of service offering within the industry.

The launch of Bakkt, due to take place next month, is the next significant move in this direction that the industry is waiting on.  Bakkt was formed by Intercontinental Exchange, owner of the New York Stock Exchange (NYSE).  It will offer physically delivered Bitcoin futures, incorporating a custody solution.

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