Theme 6: Regulation and Institutionalization in 2022

2022 Snapshots Theme 6: Regulation and Institutionalization in 2022

▪ Regulators and centralized institutions worldwide are catching up, given the rapid evolution of the digital asset sector. Specific areas ripe for regulations include stablecoins, centralized exchanges and security tokens.

▪ Regulatory clarity and institutional-grade infrastructure are the strategic elements that pave the way for institutional digital asset adoption, which will shape the operating and product environment.

▪ Long term relative risk-reward of digital assets will gradually trend down as the market environment matures.

168bn

Total stablecoins market cap (US$, 17/1/2022)

63bn

Institutional crypto AUM, YE2021 (US$)

Core thesis

The institutionalization of digital assets is a long-term secular trend, driven by the virtuous cycle of network effects. ‘Legitimized’ by regulations and institutional demand, it has become more acceptable to treat digital assets as an asset class. Regulatory clarity and institutional-grade infrastructure are the strategic elements that pave the way for institutional digital asset adoption.

Significance and Disruptive Impacts

Global digital asset regulations will pick up in 2022, with the entry of the traditional financial institutions and competitive pressures worldwide. This, in turn, will increase the urgency for institutional-grade infrastructure and solutions.

In addition, jurisdictional differences and the fragmented global regulatory landscape for digital assets inevitably give rise to regulatory arbitrage opportunities.

Expectation for 2022

1. Regulation begets legitimacy The digital asset space will face a tighter regulatory environment in 2022. A consistent regulatory framework will pave the way for mass adoption. Specific areas ripe for regulations include stablecoins, centralized exchanges and security tokens. (See Interview with Daniel Lai, Crypto.com, Interview with Kevin Loo, New Vision, Interview with Bowie Lau, True Global Ventures)

87

Number of countries exploring a CBDC 2. Institutional and government access reshape operating and product environment If 2021 was the year that governments and institutions strategized their entry into digital assets, 2022 is when they will take decisive action. We expect more countries to integrate digital assets into their financial systems (at varying degrees), which will reshape the product and operating environment. (See Interview with Gordon Crosbie-Walsh, EquitiesFirst, Interview with Ben Caselin,

90%

Combined GDP of countries exploring CBDC as a percentage of world total AAX, Interview with Emil Chan, ACMCP).

3. Risk-adjusted returns to remain elevated in 2022 and slowly come down. Long term relative risk-reward will gradually trend down as mainstream institutions continue to enter and the market environment matures. Arbitrage opportunities will gradually disappear, and trading strategies will need to evolve. (See Interview with Annabelle Huang, Amber Group, Interview with Kevin Loo, New Vision)

4. Elevated institutional M&A interest Financial and non-financial institutions play catch-up with the rapid developments in the digital asset space through M&A. (See Interview with Kevin Loo, New Vision)

5. CBDC development will enhance digital asset regulations Governments worldwide will be incentivized to implement the CBDC for its advantages as a tool to implement monetary and fiscal policy. (See Interview with Emil Chan, ACMCP)

6. Improved and streamlined infrastructure Security, compliance and liquidity will drive ecosystem maturity and mainstream adoption. Examples include KYC, institutional-grade applications and infrastructure, digital asset-related insurance and payments that create better bridges between fiat and crypto. (See Interview with Daniel Lai, Crypto.comand Interview with Adrian Clevenot, Worldpay)

Trust and transparency drive mass adoption. Longer-term, a clear separation between digital asset exchange, clearer and custodian will gradually occur with the entry of large institutional players. (Interview with Sudhu Arumugam, CoinFLEX)

7. Firms respond to regulatory and enforcement actions Firms will continuously reassess where they stand, and some may gravitate to friendlier jurisdictions as global regulators lay down digital asset regulations or take enforcement actions. (See Interview with Daniel Lai, Crypto.com)

8. More “nuanced” valuation approaches to digital assets 2022 will see investors attempting to build relative abstractions of digital assets into their valuation methodologies. (See Interview with Daniel Lai, Crypto.com)