October 30, 2024

Insights and analysis for the professional investor

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Hi readers,

In today's newsletter, Ilan Solot from Marex Solutions draws parallels between crypto and emerging markets and says the latter had moments of brilliance but failed to capture long-term interest. Will crypto face a similar "irrelevance risk"?

Then, Markus Infanger from RippleX discusses how public blockchains are set to drive the next wave of financial innovation just as the internet did for communication and commerce.

Thanks for joining us.

– Alexandra Levis

From the Analyst

From Existential to Irrelevance Risk

In the early days of cryptocurrency, existential risk was the dominant concern. We woke up in the morning wondering whether some government might ban it, or if some major stablecoin like tether could collapse, or if a major hack would wipe out an entire chain. But as crypto adoption advanced and became more integrated into the traditional financial system, these existential fears have largely faded. Especially with the approval of the ETFs in the U.S., the possibility of total collapse seems very remote.

Crypto is not going away.

But the industry faces the next big risk on the way to a maturing asset class: irrelevance. The notion of irrelevance risk might just be the most pressing concern for the crypto market today.

Consider the comparison — however fraught with nuance — between crypto and emerging markets (EM). In the early 2000s, there was immense enthusiasm around the potential of countries like Brazil, Turkey, India, China, and Poland. EM assets were seen as the next big growth sector — remember the BRICs acronym coined by Goldman's Jim O'Neill? One could walk into a meeting with a senior global portfolio manager and fluently discuss local markets in Indonesia, or politics in Mexico, or the bewildering monetary policy of the Turkish central banks. EM had so much promise, growth potential, and inefficiencies (remind you of anything?)

But, over time, interest in EM began to fade. Now, the sector is often relegated to smaller, more specialized teams, likely comprising a much smaller portion of macro funds' asset allocation. Now, PMs spend their time on the big fish like semiconductors, AI, U.S.-European rates, and commodity cycles. Why? In short, EM assets just didn't deliver returns.

Similarly, while there is still a great deal happening in the crypto space — such as bitcoin ETFs receiving inflows, Ethereum scaling solutions gaining traction, and Solana promising a faster, more scalable network — there's a risk that none of this will translate into sustained growth. Just as EM had moments of brilliance but failed to capture long-term interest, crypto faces a similar challenge.

The good news is that the industry's success depends more on its own efforts and less on exogenous factors such as regulation. Moreover, there are plenty of potential catalysts to jumpstart crypto's future. Here is a non-exhaustive list:

The rate differential between DeFi and traditional markets is improving as central banks continue cutting rates.
Search for alternative returns as the Mag7 concentration broadens.
Re-linking of BTC with the liquidity cycle.
Less crypto-averse policymakers picked under the next U.S. presidency and a favorable regulatory trend in many other countries.
Inflows picking up for BTC and (hopefully) ETH ETFs.
Stablecoin projects scaling and calling attention to the sector.
A few of the many games in development getting moderate traction.

Crypto doesn't need a single breakthrough "killer app" to remain relevant but rather a series of incremental successes across decentralized finance, stablecoins, and innovative blockchain applications. Five-to-ten Polymarket-scale protocols with similar recognition might do it.

The future remains uncertain, but the possibilities for avoiding irrelevance are certainly within reach.

- Ilan Solot, senior global markets strategist, Marex Solutions

Institutional Outlook

How Public Blockchains Will Catalyze Institutional DeFi Adoption

The tokenized asset market is set for explosive growth with Boston Consulting Group forecasting it to reach $600 billion by 2030. Public blockchains are becoming central to institutions' abilities to bring traditional financial assets on-chain, by delivering not only operational efficiency but also enhanced security, verifiable trust, and revenue-generating opportunities. While many are fully open and permissionless — allowing anyone to view transactions, build applications, and participate as validators — others incorporate permissioned elements that provide compliance and controlled participation within the same open network.

Yet a key question remains: which type of blockchain — public or private — will pave the way for institutional mass adoption?

Emerging regulatory frameworks, such as the EU's Markets in Crypto-Assets (MiCA) and Singapore's Payment Services Act (PSA), are providing much-needed clarity. Historically, private blockchains have been the go-to choice for institutions, serving as secure and compliance-friendly sandboxes. However, their restricted and siloed nature limits participation, leading to low liquidity, inefficient price discovery, and volatility for otherwise stable assets. With increased regulatory clarity, decentralized blockchains, like Ethereum or Solana, will likely become the favored path for institutions.

Public blockchains: triggering a DeFi domino effect with institutions

Leading firms such as BlackRock and Franklin Templeton are already embracing public blockchains by bringing regulated traditional financial assets, like tokenized money market funds, onto public blockchains, which is already leading to significant capital flows into DeFi. And over the next five years, we should also expect to see additional financial assets, such as private equity, to move on-chain, further accelerating institutional adoption.

By moving these assets onto public blockchains, these institutions are benefiting from greater transparency and interoperability, which streamline processes and enhance market integration. The 24/7 intraday settlement allows for more efficient capital flow management, without the constraints of traditional trading hours. For investors, these tokenized assets represent low-risk, high-quality liquidity with lower barriers to entry and better availability, making them an attractive option that brings more stability to blockchain-based markets — ultimately supporting broader adoption for DeFi.

Beyond operational efficiency and compliance: exploring revenue and liquidity opportunities

Public blockchains may look to offer compliance features to address operational and regulatory challenges faced by traditional financial institutions. Those could include mechanisms like clawback, which allows issuers to reclaim assets under specific circumstances, and freezing, which restricts accounts from sending or receiving funds to ensure regulatory compliance. Additionally, decentralized identity (DID) solutions provide secure on-chain identity verification, supporting know your customer (KYC) processes.

Source: EY-Parthenon, Gaining Ground: how institutional investors plan to approach digital assets in 2024

But adopting public blockchains also opens up new revenue opportunities through enabling global market access through fractionalization, allowing institutions to engage a broader investor base and boost trading volumes. An emerging use case is the collateralization of tokenized assets, which facilitates borrowing and leveraged trading to improve capital efficiency. Real-time, on-chain collateral management offers faster liquidity and more flexible asset deployment compared to traditional systems.

As public blockchains offer a path to a more productive financial system — the question is no longer whether institutions will adopt them, but how quickly this transformation will unfold. One thing is clear — this shift is not just redefining finance; it's laying the groundwork for DeFi to become a fundamental part of the global financial markets.

Public blockchains can serve a similar role to that of the open, public internet, which improved upon closed networks and enabled global connectivity, innovation and growth. With their open architecture and unrestricted participation, public blockchains are set to transform global finance and enable an Internet of Value.

- Markus Infanger, SVP, RippleX