(Kitco News) – Institutional investors and financial service organizations in Canada significantly increased their crypto exposure in 2023 compared to the previous bull market, according to the results of a survey conducted by accounting firm KPMG.
KPMG cited the market-wide rally, increased regulatory clarity, and new innovations in digital assets as the impetus for renewed interest from the institutional crowd.
“According to a bi-annual survey conducted by KPMG in Canada and the Canadian Association of Alternative Assets and Strategies (CAASA), 22 percent more financial services organizations offered cryptoasset products and services to clients last year than in 2021, and 26 percent more institutional investors included cryptoassets in their portfolio last year than in 2021,” the report from KPMG said.
Half of the respondents said their organizations “were actively offering at least one type of cryptoasset product or service to clients,” up from 41% in 2021, KPMG said. “Among institutional investors, nearly four in ten (39 percent) reported having direct or indirect exposure to cryptoassets, up from 31 percent in 2021.”
"The last time we did this survey in 2021, it was a strong year for cryptoassets,” said Kunal Bhasin, partner and co-leader of KPMG in Canada's Digital Assets practice. “The following year was a turbulent year, marked by fraud and collapses of major cryptoasset trading firms, but those events had a cleansing effect on the industry.”
Bhasin cited inflation and money printing as the primary motivations for the increased interest in and exposure to digital assets.
"Rising U.S. debt combined with increasing inflation likely provided a catalyst for the crypto rally of 2023, and it appears investors are looking for alternative asset classes that act as a debasement hedge and a reliable store of value,” he said. “Our survey findings suggest cryptoassets are increasingly seen as an investible alternative asset class among such institutional investors and financial services organizations in Canada.”
The survey also found that 52% of financial service providers currently offer cryptocurrency trading, while 48% offer custody, clearing, or settlement services, up from 33% in 2021.
"Canada has played a leading role in creating a regulatory environment that supports innovation in cryptoassets, from approving the first Bitcoin and Ethereum exchange-traded funds to allowing sophisticated strategies involving derivatives and Ethereum staking,” said Kareem Sadek, Emerging Technology Risk leader and co-leader of KPMG's Digital Assets practice. “Those actions, along with rising prices for cryptoassets are likely reasons why institutional investors have been increasingly attracted to the crypto space."
39% of institutional investors reported direct or indirect exposure to cryptoassets in 2023, up from 31% in 2021. Of those, 75% had direct exposure compared to 29% in 2021, and 50% said they had exposure through exchange-traded funds, close-ended trusts, or other regulated products, which is unchanged from the previous cycle.
58% reported having exposure to crypto-related public equities, 25% invested as a limited partner in a venture capital or hedge fund, and 42% reported gaining exposure through derivatives.
Financial services organizations, on average, offered two to three service offerings per respondent, up from an average of one to two services in 2021. “Client demand for cryptoasset services was a significant driver, with eight in 10 financial services respondents citing it as a major factor in their expansion of cryptoasset services – up from half in 2021,” the report said.
"Traditional financial institutions are increasingly recognizing the need to provide cryptoasset services to meet customer demand,” said Sadek. “Even so, Canada's large financial institutions will need to become more comfortable with the unique challenges related to anti-money laundering and financial crimes that are posed by cryptoassets before they offer more commercial banking services to crypto companies.”
A third of institutional investors said they’ve allocated 10% or more to their digital asset portfolios, up from 20% two years ago. “More than two thirds (67%) of investors cited the maturing market and custody infrastructure as key reasons behind their first investments in cryptoassets – up from 14 percent in 2021,” KPMG said. “More than half (58%) also cited strong market performance – up from 21% in 2021.”
Bitcoin’s price increased 150% in 2023 and is currently up by 50% in 2024.
"A pivotal moment for cryptoassets came in January 2024, when the U.S. Securities and Exchange Commission (SEC) approved spot Bitcoin ETFs,” said Sadek. “That was considered a milestone event for many market participants. That attracted many traditional asset managers with strong reputations to the cryptoasset industry.”
He added that the expected approval of an Ethereum ETF in 2024 is also providing a tailwind to the market.
“Looking ahead to 2024, we expect to see a continuation of institutional adoption of cryptoassets,” KPMG said in a separate report. “Driven by client demand, this will likely push financial services providers to improve their existing cryptoasset offerings and encourage other sidelined organizations to become more active.”
“As competition intensifies and the quality of offerings from reputable and familiar financial services providers improves, it is likely that the remaining close-minded investors may become more open to investing in cryptoassets,” they added. “We anticipate this growing adoption will reach an inflection point, where many organizations will develop and implement a comprehensive cryptoasset strategy within their overall business strategy.”
The accounting firm also sees the rising trend of Real World Asset (RWA) tokenization as a driver of adoption.
“Yield-bearing RWAs saw substantial growth in 2023 and are positioned for continued growth in 2024,” they said. “In the current high interest rate environment, holding stablecoins presents a considerable investment opportunity for yield. As a result, many cryptoasset organizations have innovative solutions that tokenize assets like treasuries or stablecoin issuance with embedded yield accruing passively to holders.”
“These innovations have led to the market share of yield-bearing RWAs growing in 2023 from 31% to 53% from January 1 to September 30,” KPMG noted. “As CeFi platforms increasingly integrate RWAs and DeFi applications leverage on-chain composability, we anticipate significant growth in RWA adoption. This trend is expected to drive increased interest from institutional investors and financial services organizations in 2024.”
“Institutional investors are drawn to RWAs for their high yields and innovative investment opportunities, while financial services organizations are poised to expand their offerings in response to heightened demand and capital flow in this sector,” KPMG concluded.