Institutional adoption of crypto assets 2023

Cryptocurrencies have been gaining increasing attention and adoption in recent years, with more and more individuals and institutions exploring the potential benefits of using digital currencies. Despite this growth, however, institutional adoption of cryptocurrencies remains relatively low. In this interview, we will explore some of the factors that have held back institutional adoption of crypto and discuss some of the steps that could be taken to increase the adoption of cryptocurrencies among institutions. We will also look at some of the potential benefits of institutional adoption of crypto and consider the role that regulators and other stakeholders may play in driving this trend. In this interview, we are speaking to Dr. Dirk Klee, Chief Executive Officer at Bitcoin Suisse AG, about institutional adoption and potential future developments.  

The year 2022 was without a doubt a challenging one in the crypto world, with the crypto winter persisting into 2023. As you have been in the financial industry for a significant time, what are your takeaways of previous crypto winters regarding market developments and volatility? What is your outlook in this regard?

Dr. Dirk Klee: Indeed, we are not only in a crypto winter but also in a time with countless bankruptcies and rumors in the industry. For experienced players, low crypto prices for a longer time are not unusual. When it comes to Bitcoin, prices are linked to its halving event, which happens roughly every four years. The next halving will take place in 2024 and, considering previous halvings, the price will subsequently start to increase.  

The crash in prices is also linked to the failure of several large market participants, among them FTX or Gemini. These crashes are symptoms of a rapidly growing industry in which regulatory guardrails in certain countries have been underdeveloped. Crypto exchanges such as FTX have moved to countries with little or no regulation, but still have global client reach. The misuse of client funds to finance other businesses is not a crypto-specific problem, but rather an issue of excessive leverage and a complete failure of corporate and financial control.  

Nonetheless, we have seen positive changes in the market too. The volatility of cryptocurrencies has decreased. This is one of the main attacking points of the crypto industry, and we are now seeing it becoming more moderate.  

Seeing that you also have a lot of experience in building scalable platform-technology – how would you rate the interest of current institutional financial players in crypto technology right now and for 2023?

Dr. Dirk Klee: Institutions are catching up and are noticing the possibilities the crypto space has to offer. 2022 already showed that some big institutions are entering the space. We see that happening with Goldman Sachs relaunching its trading desk for digital assets. Fidelity is launching a Bitcoin exchange-traded product in Europe and JP Morgan is developing a digital token and blockchain platform. I have worked at BlackRock, and it is interesting to me to see them disclosing their involvement in crypto, as it was previously commented that clients were not interested in digital assets. Blackrock has come around and opened to crypto and blockchain technology in the light of increased client interest.

Crypto has proven its resilience over the past months and it will do so even more in 2023. After the first institutional movers gained their advantages, others are following. It is important to understand that even in a crypto winter, the industry is not standing still. We and other players are developing and building our expertise and technology further – as we have learnt from traditional finance (TradFi) that new products and services will be launched once the market relaxes. The low prices and scandals might cause a delay; however, it can also serve as a necessary cleansing process before everyone starts to recognize the role of digital currencies in our society.  

Another big momentum encouraging institutional adoption evolves around ESG. With the Ethereum Merge in 2022, the original Ethereum mainnet merged with a separate Proof-of-Stake (PoS) blockchain called the Beacon Chain, now existing as one chain. The Merge reduced Ethereum's energy consumption by ~99.95%. Institutions often have certain sustainability standards they must comply with which are met by such industry moves.  

You have mentioned trust and regulations, it is safe to assume those will be driving forces for institutional adoption in 2023. What kind of developments are you expecting and how will those be implemented without impeding innovation in the space?

Dr. Dirk Klee: An important point I would like to mention is that the underlying problem in the latest crashes was not blockchain technology but Centralized Finance (CeFi) practices in the crypto space without proper regulations and processes in place. The players that failed combined different roles and responsibilities that should be separated in the same institution such as custody, clearing, market making, brokerage, and advisory. I would argue that adequate regulation will enable innovation since the trust of clients and partners will be improved by establishing a sensible regulatory framework.  

Trust and regulation are important in any financial system, including the market for cryptocurrencies. Trust is important because it helps to ensure that parties to a financial transaction can have confidence that the transaction will be carried out as agreed. In crypto the motto is “don’t trust, verify” as assets are transferred without the need for central authority. The goal here is to create transparency in processes, hence trust the concept.  

Regulation of institutions in the crypto market is also important because it helps to protect consumers and prevent financial crime such as money laundering and fraud. Cryptocurrencies are often associated with these types of activities, which should be put into perspective. The numbers are showing that 2-5% of global GDP is subject to money laundering, while it’s less than 1% out of all crypto transactions that can be attributed to illicit transactions. 

Regulation can also help to create a more stable and trustworthy market by providing clear rules and guidelines for how cryptocurrencies should be bought, sold, and used. Switzerland has so far taken a very proactive and innovative-friendly, technology neutral approach to regulation. As a “CeFi-adjacent” firm enabling clients and providing access to DeFi and crypto, we seek to apply for a bank license in Switzerland. Fulfilling regulatory requirements and undergoing advanced scrutiny will make Bitcoin Suisse an even more credible and trustworthy player in the industry than it already is.  

The European Parliament is currently discussing Markets in Crypto-Assets Regulation (MiCAR). MiCAR regulates the issuance, offer to the public, trading, custody, advice, and portfolio management of crypto assets. MiCAR has been released in 2022 and is expected to enter into force in 2023.  

Looking at the global crypto market, some crypto regulations stand out. The United States activated the Infrastructure Investment and Jobs Act (IIJA) on November 15, 2022. IIJA mandates that a broker will have to report any digital asset transfer moved to the account of an unknown person or address. The new rules stand to put tremendous emphasis on a broker's Know Your Customer (KYC) and tax information reporting systems.  

The United Arab Emirates (UAE) aim to become a major worldwide hub for virtual assets. Dubai has made significant progress by establishing the Virtual Assets Regulatory Authority (VARA), the first authority in the world solely dealing with virtual assets. In 2018, the international financial center Abu Dhabi Global Market (ADGM) developed the first Virtual Assets legislation. VARA is in the process of creating a thorough and adaptable regulatory framework that will cover all virtual asset operations, license requirements for all Virtual Asset Service Provider (VASP) categories, and supervisory frameworks to monitor, evaluate, and reduce continuing risks. 

To Bitcoin Suisse, it is important that the regulations in place make sense. They should not be stricter in the crypto industry than they are in TradFi, as this could then risk hindering innovation unnecessarily. Our ambition as a crypto-native organization is to create access to DeFi applications based on trust, safety, and consumer protection.

Thank you for setting the ground in terms of current developments, regulatory frameworks, and technological advances in the crypto space. Now take a closer look at the actual products and services you see most interest for in 2023?

Custody is the most asked for service right now. We understand that our clients want peace-of-mind storage of their crypto assets. Secure custody of cryptocurrencies is all about how you store your seed phrase and how you use it. Originally, crypto is created for self-storage. Due to increasing institutionalization of crypto, the need for trusted custodians emerged. Bitcoin Suisse for instance holds client assets either in separated custody on a client-specific blockchain address or in collective custody. In the former case, client assets can be segregated in the event of the default of Bitcoin Suisse. In the latter case, client assets are covered by a bank guarantee from a Swiss bank. Businesses thrive for the highest possible security.   

Another service in demand from clients is trading and brokerage. We have talked enough about the risks, and everyone has learnt to look for limited counter-party risk. In 2022, we have seen other players risking client funds by not pre-funding trades. Swiss regulations are clear and we only trade for our clients through the most trusted and liquid exchanges worldwide. We take over the risk of dealing with exchanges for our clients. 

Especially after the Ethereum Merge in 2022, Proof-of-Stake blockchains and with that, the service staking is becoming more and more popular. We see this as another signal for increasing demand for crypto by institutional clients, as it is an attractive solution to enable investors to obtain asset returns similar to yields from traditional financial products. Staking cryptocurrency is an ecologically friendly technique to secure the network because it does not demand a lot of processing power. Staking also contributes to the blockchain's increased effectiveness and security. 

Lastly, and what I believe to be the fastest growing service is the need for advice and guidance in the crypto market. Especially in the institutional world, expertise in crypto is limited. Experienced, trusted partners are asked to provide insights into the crypto market, mechanisms, and projects. We have seen this a lot, as we have been actively in the space for almost 10 years now. As I have previously mentioned, the industry experiences a large number of scams and attempted fraud. Nevertheless, there are trusted partners in the crypto industry that seek to protect consumers and enable the use and adoption of DeFi applications in a safe and transparent manner.

Last year was marked by considerable setbacks on the path to more widespread crypto adoption. Which chances and opportunities do you see in the financial space to further strengthen adoption of crypto assets and blockchain technology?

In general, I think that increasing accessibility and education about cryptocurrencies, as well as improved security and stability of firms offering crypto products, will help to increase adoption. Additionally, partnering with established financial institutions and businesses may also help to build trust and confidence in cryptocurrencies. This will also further drive institutional adoption.  

Usually, bear markets and developments, such as those we have recently seen, take time. ~“~It may still take time to see positive developments in the crypto space emerging from the lasting bear market. People and businesses will and are developing and innovating, while the macro environment is recovering. Over the upcoming time, more good things will emerge and we will see that the latest crashes are helping to improve the overall crypto space, as bad actors are getting flushed out of the market.  

It’s a great chance to move away from speculation and hype, towards blockchain innovation and how it can enable a more efficient financial system. Scandals push the process of eliminating speculative business towards more credible projects. There are some great real-world applications and tokenization projects that bring opportunities for crypto adoption in the market. The industry has been overly focused on speculative business and needs to re-focus now. That is a good thing.  

Overall, weak players and projects will be left out and trust – regaining and rebuilding it - moves into the center of attention. Regulations that are on the horizon can create space for innovation in a safe way, and we as a crypto-native organization encourage technology-friendly approaches.  

Thank you.