Key Takeaways
- • Institutional investors view digital assets as a promising asset class set to expand substantially, with 69% of surveyed institutions anticipating increasing their allocations to digital assets and/or related products within two to three years, according to a 2023 survey cited in the Economist Enterprise brief.
- • Institutions expect digital asset holdings to reach 7.2% of their portfolios by 2027, per the same research.
- • Regulated, institutional-grade third-party custodians are emerging as trusted partners, with third-party custody the first choice for 80% of crypto hedge funds and traditional hedge funds.
- • Regulatory convergence, including the EU's Markets in Crypto-Assets Regulation (MiCA), is seen as essential to reducing market uncertainty and protecting institutional participants, though classification of tokenised fiat and tax treatment remain unresolved questions.
- • Risk management, spanning operational, market, counterparty, regulatory and technology risks such as hacking and transaction irreversibility, is identified as a prerequisite for digital assets to become entrenched in institutional portfolios.
Summary
A research brief from Economist Enterprise, written by senior analyst Bilge Arslan and sponsored by OKX, examines the maturing digital asset ecosystem and the considerations facing institutional investors. The brief draws on a roundtable held in Dubai in the second quarter of 2024, supplemented by expert interviews and desk research, and organises its findings around four areas: institutional asset allocation, custody, regulatory development and risk management.
On allocation, the brief reports that increasingly mature blockchain technology, digital security infrastructure, ongoing efforts toward global regulatory clarity and tokenised real-world assets are driving adoption. According to a 2023 survey, 69% of institutional investors anticipated increasing allocations to digital assets and/or related products over the following two to three years, and they expect digital assets to constitute 7.2% of their portfolios by 2027. Popular approaches include spot cryptocurrency investments, mutual funds and ETFs holding companies tied to the blockchain and digital asset industry, and PE/VC-style investments in firms. Thijs van Boven, head trader of digital assets at VanEck, noted that asset management and banking clients are seeking exposure through instruments such as ETFs, exchange-traded notes and blockchain platforms.
On custody, the brief finds that demand for third-party custodians is particularly strong, being the first choice for 80% of crypto hedge funds and traditional hedge funds. Regulated qualified custodians that meet stringent compliance and licensing requirements are positioned as trustworthy partners.
Regulation remains a central concern. Jagadeshwaran Kothandapani, head of MEA and MEP Payments at Citi Services, questioned whether fiat currencies operating as tokens on distributed ledgers should be treated as currency or as assets for regulatory, legal and tax purposes. The brief cites the EU's Markets in Crypto-Assets Regulation as a first cross-jurisdictional regulatory and supervisory framework and a step toward standardisation, and calls for cross-border cooperation and information-sharing. Anthony Scaramucci, founder and managing partner at Skybridge Capital, said the onus is on regulators to "finalise sensible regulation that protects consumers and cultivates responsible innovation."
On risk management, the brief notes that digital asset adoption carries operational, market, counterparty, regulatory and compliance risks, along with infrastructure-specific threats including hacking, ransom attacks, transaction irreversibility and systems failure. It recommends established tools such as value-at-risk modelling, scenario analysis, stress testing, independent audits and proof of reserves, alongside technology such as machine learning for blockchain transaction monitoring and anti-money laundering, and smart contract risk assessment tools.
On allocation, the brief reports that increasingly mature blockchain technology, digital security infrastructure, ongoing efforts toward global regulatory clarity and tokenised real-world assets are driving adoption. According to a 2023 survey, 69% of institutional investors anticipated increasing allocations to digital assets and/or related products over the following two to three years, and they expect digital assets to constitute 7.2% of their portfolios by 2027. Popular approaches include spot cryptocurrency investments, mutual funds and ETFs holding companies tied to the blockchain and digital asset industry, and PE/VC-style investments in firms. Thijs van Boven, head trader of digital assets at VanEck, noted that asset management and banking clients are seeking exposure through instruments such as ETFs, exchange-traded notes and blockchain platforms.
On custody, the brief finds that demand for third-party custodians is particularly strong, being the first choice for 80% of crypto hedge funds and traditional hedge funds. Regulated qualified custodians that meet stringent compliance and licensing requirements are positioned as trustworthy partners.
Regulation remains a central concern. Jagadeshwaran Kothandapani, head of MEA and MEP Payments at Citi Services, questioned whether fiat currencies operating as tokens on distributed ledgers should be treated as currency or as assets for regulatory, legal and tax purposes. The brief cites the EU's Markets in Crypto-Assets Regulation as a first cross-jurisdictional regulatory and supervisory framework and a step toward standardisation, and calls for cross-border cooperation and information-sharing. Anthony Scaramucci, founder and managing partner at Skybridge Capital, said the onus is on regulators to "finalise sensible regulation that protects consumers and cultivates responsible innovation."
On risk management, the brief notes that digital asset adoption carries operational, market, counterparty, regulatory and compliance risks, along with infrastructure-specific threats including hacking, ransom attacks, transaction irreversibility and systems failure. It recommends established tools such as value-at-risk modelling, scenario analysis, stress testing, independent audits and proof of reserves, alongside technology such as machine learning for blockchain transaction monitoring and anti-money laundering, and smart contract risk assessment tools.
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