April 7, 2022 • 29 mins
Host and National Lead, Digital Services, Adam Rodricks is joined by Kunal Bhasin, Director, Technology Risk Consulting, Ken Viegas, Senior Consultant, Technology Risk Consulting, and James Burron from the Canadian Association of Alternative Strategies and Assets (CAASA) as they highlight key findings from KPMG's industry benchmarking survey.
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Episode Transcript
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(00:00):
Hello everyone and welcome back to KPMG in Canada’s state of cryptoassets podcast series. Before we get going today, we want to address the gap between our episodes. For those of you who may have missed it KPMG in Canada recently added both Bitcoin and Ether to our corporate treasury before then purchasing an NFT from the World of Women collection, processes that took us away from the podcast studio for a couple of weeks. However, we are officially back with a great episode dedicated to our institutional adoption of cryptoassets survey and the results that came from said survey. To get us started today, I would like to welcome today's guests, including PodBytes veterans Kunal Bhasin and Ken Viegas as well as introduce James Burron from CAASA. James, would you like to introduce yourself for our listeners?
(00:53):
You bet, thanks. Well, CAASA is short for the Canadian Association of Alternative Strategies and Assets. Uh, so we like to say CAASA; it's a bit quicker off the off the tongue there. We began about 4 years ago, a little bit more than 4 years ago, and we have more than 330 members now across all parts of the alt industry, including liquid alts, hedge, private equity, venture, real estate, private lending and of course, digital assets and crypto. Pretty good mix of managers about half managers, quarter investors, pension plans, family offices and of course, service providers like KPMG. Our goal is to represent the industry at-large, provide forums where folks can connect and, move forward the conversation with everyone along these many different lines. We see a fair bit of overlap as well; a lot of webinars, we've been really busy the last couple of years. That's us in a nutshell.
(01:45):
Excellent. Well, it certainly sounds like we've engaged the right man for the job. Welcome to the podcast, James. I want to segway to Kunal. Now, Kunal, you are my why guy. Could you run our listeners through why this survey was conducted?
Yeah, absolutely, Adam. Pleasure to be here again. So, as we were thinking about our practice and how we grow our practice at KPMG, there were a couple of reasons why we thought of the survey. One - we've seen quite a bit of traction in both financial services and institutional investor side, given the regulatory clarity that we have in Canada. Especially with the crypto ETFs launch in the last couple of years, we wanted to measure the level of institutional adoption specifically in Canada. Given that this year is the 1st year of our annual survey, we will be able to measure the growth and the changing perceptions on an annual basis going forward.
(02:41):
The second reason why we wanted to do the survey was we wanted to gain insights into the factors that were leading to the increased institutional adoption on both buy and sell side. As we all know, crypto has had a unique trajectory as an asset class because it really started with significant retail adoption and, and then moved into institutional adoption for various reasons. You know, as part of the survey, we collected responses from institutional investors that are adopting crypto because it's no longer a career risk for them. It is now a viable alternative asset class that institutions can allocate to and we have demonstrated that by our investments as well.
(03:33):
Secondly, we also got responses from the financial services side, which is more likely to adopt crypto and offer crypto products and services because their clients are demanding it and they're not going to do it, their competitor will. We wanted to capture both the buy and sell side and just given the regulatory clarity, have this survey play the role of being able to measure the growth and institutional adoption of cryptoassets, which is really our objective as practice and as a firm.
(04:07):
Right - that is a fantastic explanation. James, I'm wondering if you could explain to us how this survey differs from other surveys that have been conducted in this space.
Yeah, there’s been a few; they usually look at the investors and specifically institutional investors. We know the take up there has been relatively slow. As Kunal said though, most things started in the institutional realm, went to family office, and then hit retail. This is probably the only large asset class investment we've seen that started in retail and is now steadily moving up through family offices. I talk to many of them and now into the institutional space, so that's important to get all areas of that.
(04:49):
But also to support that, you have to have a financial services behind it; shops like yours and others that provide the custody and all the other fun admin and trading and such. That’s an area that obviously the regulators are looking at very, very carefully to make sure that everything is appropriate and suitable for the types of investors that are in.
(05:10):
But the other ones also are typically global or US, Asia, Europe and this is the only one that's Canada, which is fantastic. KPMG in Canada with CAASA to work on this. Our second kind of motto is to bring Canada to the world and the world to Canada and we think we have a lot of great things going on in crypto here. When I travel around, people think “Wow, Canada, you guys got lots of crypto. You guys are totally onto it and they're just really happy to have countries like ours that are that are leading the charge here. So, I love that its Canada, and then it's looking at the full kind of ecosystem versus just what the investors are looking at, because they really need to have that that service provider backdrop before they can invest. So, it'll be a bit of a leading indicator, I think.
(05:57):
You nailed it James, and I love that its Canada too, really the first of its kind type of survey in the Canadian market. I think we provided a really good overview of the why as well as the how but, Ken, I want to come to you. Could you give us a high level overview of what the survey findings actually tell us.
For sure. The crypto industry - it's maturing, the alternative asset class. It can no longer be ignored and I would encourage every organization to at least do a little bit of research and look into the whole crypto ecosystem in order to see if it's the right fit for them. As Kunal stated earlier, adoption was initially driven by retail demand. The lack of maturity among early crypto service providers made it challenging for institutions to participate in the market. Now with institutional demand growing, the crypto market infrastructure increasingly resembles the traditional financial ecosystem and it's improving rapidly to meet their needs.
(06:51):
That's a really helpful overview. Thank you, Ken. So, you alluded to it without exactly hitting on it but based on the survey responses, could you tell us about how crypto assets are perceived by both institutional investors and financial institutions?
For sure. Generally speaking, both financial service and institutional investors have some remaining concerns around regulatory clarity, although a bit less of an issue for an institutional investor as the regulatory requirements tend to be a little bit more steep or strict to offer a service. Now, the lack of regulatory clarity comes as a slight surprise given the fact that Canada was the first country to allow cryptoasset ETFs. This could be driven by other participants, such as organizations trading cryptoassets directly as opposed to a regulated investment product. Now, the data shows that many organizations across both groups remain neutral toward cryptoassets, but only a few feel strongly positive about cryptoassets. Now, my expectation is that in 2022, we will see more group shifts from holding neutral views towards crypto to feel slightly and strongly positive. This will be driven by continued institutional adoption.
(08:05):
Ken, you know I love talking to you, because not only do you offer this fabulous insight, but often unknowingly you provide a perfect segway to my next question, which I'm going to be directing to James. James, Ken touched on the expectation that sentiment towards crypto will continue to shift towards the positive side in 2022, but how are perceptions impacting the actions some of these organizations are taking? So specifically, when we talk about some of the adoption trends that those survey revealed.
(08:34):
Yeah, he's totally right; Ken nailed it. What I love about this survey is it's a baseline. Almost happy to see some strongly negative, slightly negative, because it can only get better from here. We did a crypto venture panel a few weeks ago and one of the quotes from that was “9 months ago, it was a career risk to look into crypto if you're working at a major pension plan. Now, it's career risk if you don't know how this stuff works.”
(09:00):
We also had a digital assets global exchange conference last September, all digital. People could go in and people would necessarily know that they were there. We had a lot of people from pension plans so I think some some folks at those plans kinda told their team “Hey, you know what? Here's a place to learn about this stuff and and get some great info, ask some questions.” You know, this year, 2022, we're in person, maybe they come to the venue as well.
(09:30):
But, you know, it's really been a bit of a sea tide. I've seen this past in my career in Korea when we started working with front of hedge funds. Things were negative, negative, negative until suddenly they kind of turned into inflection point. It may not be everybody's super positive right away. It'll take a while. I've been traveling a lot and some other pension plans, they've said, “No, we're not in the crypto. We're not even looking at it.” And in the back of my mind, I'm thinking, well, at some point, they will be, and that's great because, if everybody's in, it may not be that great of a trade but it's yeah, it's pretty wild with what's happening here. Um.
(10:08):
You're right too, with what Canada’s has been doing. I went to the hearing actually at the Ontario Securities Commission for one of the funds that were coming out and one of the main arguments along with all the other parts that is very similar actually, to many of the equity and on trading ecosystems is that Canadians and people around the world are buying it anyways, so it's great to have a regulated vehicle with prescribed custodians and brokers and fund administration tools that are there so that everybody makes sure that they have true ownership of these assets, [which is] way better than having an unregulated exchange where people will end up going and maybe not only having investment losses, but also perhaps fraud or all these other types of things that can occur when things are not regulated.
(11:00):
Thank you for those insights, James. So, we've talked a lot about positive perceptions and increased adoption on today's episode, but I want to segway to some of the barriers to adoption that were noted by respondents. Maybe Kunal, could you take us through these?
Yeah, absolutely. You know, as part of our survey, we wanted to look at both the perception as well as what are the challenges that both buy and sell side are facing in institutional adoption. As James mentioned, you know, this is the first of its kind and the first year for the survey. Well, it just gets more positive from here, so it was good to see those challenges.
(11:41):
The key challenges that that were highlighted, as part of the survey was one, you know, not to our surprise, was regulation. You know, regulatory clarity has been provided by the various Canadian institutions. It is just that there still needs to be more regulatory clarity that needs to be provided. We know that Bitcoin and Ethereum are investable assets. But investors are still uncertain whether the other cryptoassets such as stablecoins or other tokens, will those be classified as securities? If they are, how do they actually treat them? So, they are still, especially on the institutional investor side, there is still some more clarity that needs to be provided and also I would say a role on the institutional investors that needs to be played by looking at all of these regulations a lot more deeply and understanding how the other financial services providers are able to help them meet these regulations.
(12:42):
That said, financial services are also struggling around offering various products, especially the ones that involve yields and derivatives. We've seen some action come out of the US as well, some major findings that were brought out. Those kinds of things really set things back for both institutional investors and financial services.
(13:08):
The other barrier to adoption that we saw was custody. Investors cited their concern over being able to safeguard their own assets and understanding how to manage the counterparty credit risk. So that's a fair barrier to adoption, but I think it's just working with a custodian that is able to provide that institutional level offering is gonna be key for continued adoption. There are quite a few custodians that are coming up with their institutional offerings, both here in Canada, we have some qualified custodians as well as some of the major custodians from outside of Canada as well. So, really looking into how do you assess these custodians? How do you manage that counterparty credit risks? How do you manage the operations with these custodians? That's gonna be key to understanding for this barrier to be to be lifted.
(14:13):
The third one is price volatility. As we all know, crypto is quite volatile. I think a lot of that has to do with the whole, in the past, as we said, retail was the one that initially adopted crypto. We saw price moments based on some news or something that was on crypto Twitter. As we are continuing to see more maturity in the space and more institutions coming in, that volatility is actually settling down a bit. That being said, it is still volatile and crypto is still at the higher risk spectrum for asset classes. This does introduce the fact that crypto trades 24/7; that actually brings in additional market and operational risk as well as some enhanced liquidity and settlement requirements that need to be tackled.
(15:17):
So, while these concerns, we believe, will likely remain persistent in this year in 2022, we recognize that the cryptoasset industry will continue to mature with its various custodial solutions. We will get more regulatory clarity; we're hoping to get more regulatory clarity, especially from OSFI for banks in the space, to be able to provide some of these products and services. And furthermore, as more institutional investors enter the space, we know that traditional financial services will start to develop offerings to manage those demands as well. So, yeah, no, I think these are some of the various barriers to adoption that were cited in our report and I don't believe anything out of this comes as a surprise to us. I think it's just now, that these various institutions understand what are the barriers, it's about, recognizing how to manage these barriers and that's something that we've done a lot with our clients.
(16:22):
Yeah, and they've really started to talk about it amongst themselves to socialize it. I was just at a conference, a discussion room on crypto operational due diligence; really great panelists. One of the panelists said “We did something like this in 2019, 2 people were here. Now, this room is so packed, we've got people standing up.” 1 person is almost sitting on the floor. So packed; it was a big deal and one of the things that came up was “What about what about gray lists? What do you do there? Do you allow people to trade crypto because you're trading in it, and maybe you're trading in some of these new tokens that are going to come out. How do you work on that?” So, it's great that we're talking about it.
(17:03):
They don't quite have all the answers yet but, you know, these ops and compliance pros at the fund managers and investors are really looking at that. Some of them would say, “We don't really care about Bitcoin and Ethereum because it's hard to manipulate that it's so big but all the other ones are on the list for the do not trade or gray list”. Others that were strictly trading Bitcoin and Ethereum were saying, “No, no, we actually have these in our gray list.” So, depending on how they look at the market, they're developing their own solutions and it's great that the industry is just doing this.
(17:38):
Yeah, I think the great point for the regulators is that the regulators are more receptive to receiving applications and engaging with the institutional participants and the crypto native companies that are looking to offer services. We hope to see a lot more regulatory clarity come out of these discussions and we have quite a few forums like CAASA, we have the Canadian Blockchain Consortium, all of these are really trying to push the boundaries for Canadian regulatory clarity to be provided. And it really sets the precedent for other countries.
(18:22):
James, such a polarizing example and Kunal, thank you for a fantastic overview, really. As an aside, and it may be a bit of a glimpse behind the scenes of this podcast. I want to share one thing that I've noticed, particularly through the planning of this episode, and even just leading up to the recording. It's just the downright excitement that you all exhibit about the survey and its results. So, I was wondering if we could each, maybe take some time to talk about what the most interesting finding was in your eyes. James, as our guest of this episode, we'll offer you the floor first before then going to Kunal and then finally, Ken.
(18:56):
Thanks. There's 1 little chart there that I really like, I was interested in. Pretty surprising that 29% of the respondents are already allocating directly to crypto - that I thought was high ish, but maybe the sample, they're excited as well. But that's that's great to see. That's fantastic. That's obviously one way to get access. Regulated products at 50% really makes sense. Like I say for the reasons with the OSC hearing that getting through, getting access to these return streams through some types of ETFs or close-end trust or what have, you really can make a lot of sense.
(19:37):
On a personal note, if it's in your RRSP, then when you pass on, it goes to your wife and kids or your spouse and kids. That's fantastic versus not knowing necessarily where your keys are. The VC and hedge exposure, that's the next logical line, like I say, with our crypto venture panel that we had, that makes sense; that is where a lot of institutional investors already have investments in the venture capital space; soon the crypto area will probably mature to be more private equity. Maybe there'll be LBOs at some point here, but it's kind of going up and down the different waterfalls.
(20:13):
Given how high custody and the like are, the risk categories, you know, I thought it kind of made sense that the direct crypto access would be lower but, you know, all the other ones really make a lot of sense here especially like public equities too. That's kind of a no brainer. You are just buying a company stock, and even in the retail realm, buying a company’s stock is probably one of the easiest things to do, easier than a mutual fund sometimes because it has to get on the platform or getting directly into crypto. So these all made sense. I would say I was surprised at the direct cryptoassets access being so high.
(20:54):
Yep, I would say, one that really stood out for me was the investment thesis for institution investors. The maximum percentage of institutional investors cited DeFi services as their investment thesis for adopting crypto, which I thought was one really cool and second, that was very unexpected. You know, as a team, we've been working with DeFi quite a bit. We're actually doing demos with clients. So that really goes to show that institutional investors are interested just beyond investing in Bitcoin and Ethereum directly or indirectly, but they are also interested in the new generation, the stable coins and how they can actually leverage DeFi services. And now we have institutional offerings for DeFi out there as well, so I thought this was really, really interesting.
(21:57):
The other one that I wanna I want to highlight is, you know, one of the drivers of adoption, which our institutional investors cite was leadership buy-in. We couldn't agree more; we had to go through that same cycle as part of our 8 or 9 month long journey to get Bitcoin and Ethereum on our Treasury. We had to get to a lot in order to get that leadership buy-in, but I think that really, really pushed us to do all our due diligence in the right manner to get there.
(22:29):
Kunal, think you nailed it there. I was just going to mention that, you know, one of the interesting facts that I found in our survey was that most of the participants have a neutral or positive view towards crypto. As Adam mentioned earlier with our public announcement that KPMG allocated Bitcoin and Ethereum to our balance sheet, I think it further support supports that point given that it was so well received amongst all institutions and within the media itself. So, I think, you know, this is very optimistic. It keeps me bullish. I think we'll see a lot more a lot more institutions adopting crypto in the near future.
(23:07):
Love the optimism. I love the passion that you all have. It's all over these responses, and it is so great to hear. So to wrap up today's session, I really want to end on a well, it's a rather large question for our group. It's really because there is no doubt that crypto is here to stay. So the question pertains to organizations and what they can do to get involved. Kunal, do you want to start us off?
(23:31):
Yeah, absolutely I think the first thing that we tell our various clients that we work with is if you want to stay relevant in the next 5 to 10 years, you really need to know how crypto impacts your business and how you can get involved. This is not only like financial services and institutional investors, but also industries outside of these too because, you know, crypto is here to stay as you said, and it is becoming an investable asset class.
(24:06):
It is going to continue to see that growth as an investment but also, we'll see growth of the likes of stable coins and other kind of cryptoassets, which will play a large role in how we transact with each other, how we transact with companies, so it's no longer just limited to institutional investors and financial services, but any organization that's out there, whether you're a charity, whether you're a business static that wants to accept crypto assets as payment. You know, there are lots of opportunities out there and the first question really is “How does this impact us and how can we engage, how can we take advantage of this new asset class that's booming?”
(24:55):
Yeah, I liken it to kind of like the Internet. I mean, many have obviously, I think now, on the adoption basis, it's about 1998, which we know what happened. Then 1999 was huge for Internet stocks and then there was a TMT crash and such, so there will be volatility in this. But, I mean, with that though, what you, what you got out of the Internet and the worldwide web was not just a website. It was really a way of doing commerce without having to send faxes and just free transfer of information. This is, you know, with these Ethereum being the world's biggest supercomputer, then you have Bitcoin, being inflation proof, money or currency, I kind of call it a store of currency right now because at some point, we'll be able to actually use it in a meaningful way like, they are in El Salvador.
(25:43):
I think if folks go to, and this is a little self serving, because we have like a whole training date at our digital conference where people can learn a lot about it (Kunal of course, has been presenting at it over the last while too) just try to figure out where they can fit within this versus a blanket statement of “This is a scam, or this is the best thing in the world.” There's, there's some place, I think, for many businesses, many industries, whether it's mining it or, like like the old 849; providing the picks and shovels to the miners and such and all the other ancillary services around it. So, I think it behooves most, if not all companies to, to see how they can fit into this.
James, I think that's a great point. You know, I think most institutions and corporations out there need to keep an open mind about cryptoassets and it really starts with education (26:27):
understanding all the complexities that crypto has and also getting that first hand experience will really open their mind to the opportunities within the crypto ecosystem. And I think, you know, going forward, even retail investors are likely to continue rapidly adopting crypto assets.
(26:51):
So, you know, within DeFi, NFT, and GameFi sectors, they'll all continue to bring new participants to the space, and we can talk about this trend in our next episode when we turn our focus to NFTs, GameFi, and [the] metaverse, but this is something that will push additional financial institutions and institutional investors to learn more about.
Yep, I, I think, you know, Ken, one of the points that you mentioned was spot on - the hands on experience. The way for even us to get that leadership buy in as KPMG in Canada engaged with crypto was to get our leadership hands on experience working with hardware wallets, interacting with DeFi services, transferring crypto, buying crypto, being able to custody crypto as well. We had to get that hands on experience for them to really understand the power of this, this technology, this innovation. I think that's gonna be key.
(27:49):
One of the things that I want to mention is DeFi. We're gonna have a whole separate episode on it, but given the the stats that really stood out for me, I think institutions that want to experience, or at least see first hand the experience of how one uses DeFi applications. Our Treasury initiative has now allowed us to actually engage and give live demos of these DeFi applications as well. So, I think that's been proving really, really helpful for a lot of institutions to wrap their head head around what DeFi is, how to engage with this, and how can they actually get more use out of out of this as well. So, it's a really exciting time for us as a practice and for the whole crypto community as a whole and we just want to play a part in promoting the community across the globe, not only in Canada.
(28:42):
Gents this has been great, but unfortunately, we are out of time for today's episode. To wrap, I would like to extend a big thank you to Ken, Kunal and James for joining me today. We appreciate it very much.
It’s been great. Thanks a lot.
Thanks Adam.
Thanks, Adam. This has been great. And I think we'll have some great discussions in the future as well.
Absolutely, and in addition to these awesome guests, I would also like to extend a big thank you to our loyal listeners. Stay tuned for a brand new episode next week when we will dive into all things NFT. Bye for now everyone!
Hello everyone and welcome back to KPMG in Canada’s state of cryptoassets podcast series. Before we get going today, we want to address the gap between our episodes. For those of you who may have missed it KPMG in Canada recently added both Bitcoin and Ether to our corporate treasury before then purchasing an NFT from the World of Women collection, processes that took us away from the podcast studio for a couple of weeks. However, we are officially back with a great episode dedicated to our institutional adoption of cryptoassets survey and the results that came from said survey. To get us started today, I would like to welcome today's guests, including PodBytes veterans Kunal Bhasin and Ken Viegas as well as introduce James Burron from CAASA. James, would you like to introduce yourself for our listeners?
(00:53):
You bet, thanks. Well, CAASA is short for the Canadian Association of Alternative Strategies and Assets. Uh, so we like to say CAASA; it's a bit quicker off the off the tongue there. We began about 4 years ago, a little bit more than 4 years ago, and we have more than 330 members now across all parts of the alt industry, including liquid alts, hedge, private equity, venture, real estate, private lending and of course, digital assets and crypto. Pretty good mix of managers about half managers, quarter investors, pension plans, family offices and of course, service providers like KPMG. Our goal is to represent the industry at-large, provide forums where folks can connect and, move forward the conversation with everyone along these many different lines. We see a fair bit of overlap as well; a lot of webinars, we've been really busy the last couple of years. That's us in a nutshell.
(01:45):
Excellent. Well, it certainly sounds like we've engaged the right man for the job. Welcome to the podcast, James. I want to segway to Kunal. Now, Kunal, you are my why guy. Could you run our listeners through why this survey was conducted?
Yeah, absolutely, Adam. Pleasure to be here again. So, as we were thinking about our practice and how we grow our practice at KPMG, there were a couple of reasons why we thought of the survey. One - we've seen quite a bit of traction in both financial services and institutional investor side, given the regulatory clarity that we have in Canada. Especially with the crypto ETFs launch in the last couple of years, we wanted to measure the level of institutional adoption specifically in Canada. Given that this year is the 1st year of our annual survey, we will be able to measure the growth and the changing perceptions on an annual basis going forward.
(02:41):
The second reason why we wanted to do the survey was we wanted to gain insights into the factors that were leading to the increased institutional adoption on both buy and sell side. As we all know, crypto has had a unique trajectory as an asset class because it really started with significant retail adoption and, and then moved into institutional adoption for various reasons. You know, as part of the survey, we collected responses from institutional investors that are adopting crypto because it's no longer a career risk for them. It is now a viable alternative asset class that institutions can allocate to and we have demonstrated that by our investments as well.
(03:33):
Secondly, we also got responses from the financial services side, which is more likely to adopt crypto and offer crypto products and services because their clients are demanding it and they're not going to do it, their competitor will. We wanted to capture both the buy and sell side and just given the regulatory clarity, have this survey play the role of being able to measure the growth and institutional adoption of cryptoassets, which is really our objective as practice and as a firm.
(04:07):
Right - that is a fantastic explanation. James, I'm wondering if you could explain to us how this survey differs from other surveys that have been conducted in this space.
Yeah, there’s been a few; they usually look at the investors and specifically institutional investors. We know the take up there has been relatively slow. As Kunal said though, most things started in the institutional realm, went to family office, and then hit retail. This is probably the only large asset class investment we've seen that started in retail and is now steadily moving up through family offices. I talk to many of them and now into the institutional space, so that's important to get all areas of that.
(04:49):
But also to support that, you have to have a financial services behind it; shops like yours and others that provide the custody and all the other fun admin and trading and such. That’s an area that obviously the regulators are looking at very, very carefully to make sure that everything is appropriate and suitable for the types of investors that are in.
(05:10):
But the other ones also are typically global or US, Asia, Europe and this is the only one that's Canada, which is fantastic. KPMG in Canada with CAASA to work on this. Our second kind of motto is to bring Canada to the world and the world to Canada and we think we have a lot of great things going on in crypto here. When I travel around, people think “Wow, Canada, you guys got lots of crypto. You guys are totally onto it and they're just really happy to have countries like ours that are that are leading the charge here. So, I love that its Canada, and then it's looking at the full kind of ecosystem versus just what the investors are looking at, because they really need to have that that service provider backdrop before they can invest. So, it'll be a bit of a leading indicator, I think.
(05:57):
You nailed it James, and I love that its Canada too, really the first of its kind type of survey in the Canadian market. I think we provided a really good overview of the why as well as the how but, Ken, I want to come to you. Could you give us a high level overview of what the survey findings actually tell us.
For sure. The crypto industry - it's maturing, the alternative asset class. It can no longer be ignored and I would encourage every organization to at least do a little bit of research and look into the whole crypto ecosystem in order to see if it's the right fit for them. As Kunal stated earlier, adoption was initially driven by retail demand. The lack of maturity among early crypto service providers made it challenging for institutions to participate in the market. Now with institutional demand growing, the crypto market infrastructure increasingly resembles the traditional financial ecosystem and it's improving rapidly to meet their needs.
(06:51):
That's a really helpful overview. Thank you, Ken. So, you alluded to it without exactly hitting on it but based on the survey responses, could you tell us about how crypto assets are perceived by both institutional investors and financial institutions?
For sure. Generally speaking, both financial service and institutional investors have some remaining concerns around regulatory clarity, although a bit less of an issue for an institutional investor as the regulatory requirements tend to be a little bit more steep or strict to offer a service. Now, the lack of regulatory clarity comes as a slight surprise given the fact that Canada was the first country to allow cryptoasset ETFs. This could be driven by other participants, such as organizations trading cryptoassets directly as opposed to a regulated investment product. Now, the data shows that many organizations across both groups remain neutral toward cryptoassets, but only a few feel strongly positive about cryptoassets. Now, my expectation is that in 2022, we will see more group shifts from holding neutral views towards crypto to feel slightly and strongly positive. This will be driven by continued institutional adoption.
(08:05):
Ken, you know I love talking to you, because not only do you offer this fabulous insight, but often unknowingly you provide a perfect segway to my next question, which I'm going to be directing to James. James, Ken touched on the expectation that sentiment towards crypto will continue to shift towards the positive side in 2022, but how are perceptions impacting the actions some of these organizations are taking? So specifically, when we talk about some of the adoption trends that those survey revealed.
(08:34):
Yeah, he's totally right; Ken nailed it. What I love about this survey is it's a baseline. Almost happy to see some strongly negative, slightly negative, because it can only get better from here. We did a crypto venture panel a few weeks ago and one of the quotes from that was “9 months ago, it was a career risk to look into crypto if you're working at a major pension plan. Now, it's career risk if you don't know how this stuff works.”
(09:00):
We also had a digital assets global exchange conference last September, all digital. People could go in and people would necessarily know that they were there. We had a lot of people from pension plans so I think some some folks at those plans kinda told their team “Hey, you know what? Here's a place to learn about this stuff and and get some great info, ask some questions.” You know, this year, 2022, we're in person, maybe they come to the venue as well.
(09:30):
But, you know, it's really been a bit of a sea tide. I've seen this past in my career in Korea when we started working with front of hedge funds. Things were negative, negative, negative until suddenly they kind of turned into inflection point. It may not be everybody's super positive right away. It'll take a while. I've been traveling a lot and some other pension plans, they've said, “No, we're not in the crypto. We're not even looking at it.” And in the back of my mind, I'm thinking, well, at some point, they will be, and that's great because, if everybody's in, it may not be that great of a trade but it's yeah, it's pretty wild with what's happening here. Um.
(10:08):
You're right too, with what Canada’s has been doing. I went to the hearing actually at the Ontario Securities Commission for one of the funds that were coming out and one of the main arguments along with all the other parts that is very similar actually, to many of the equity and on trading ecosystems is that Canadians and people around the world are buying it anyways, so it's great to have a regulated vehicle with prescribed custodians and brokers and fund administration tools that are there so that everybody makes sure that they have true ownership of these assets, [which is] way better than having an unregulated exchange where people will end up going and maybe not only having investment losses, but also perhaps fraud or all these other types of things that can occur when things are not regulated.
(11:00):
Thank you for those insights, James. So, we've talked a lot about positive perceptions and increased adoption on today's episode, but I want to segway to some of the barriers to adoption that were noted by respondents. Maybe Kunal, could you take us through these?
Yeah, absolutely. You know, as part of our survey, we wanted to look at both the perception as well as what are the challenges that both buy and sell side are facing in institutional adoption. As James mentioned, you know, this is the first of its kind and the first year for the survey. Well, it just gets more positive from here, so it was good to see those challenges.
(11:41):
The key challenges that that were highlighted, as part of the survey was one, you know, not to our surprise, was regulation. You know, regulatory clarity has been provided by the various Canadian institutions. It is just that there still needs to be more regulatory clarity that needs to be provided. We know that Bitcoin and Ethereum are investable assets. But investors are still uncertain whether the other cryptoassets such as stablecoins or other tokens, will those be classified as securities? If they are, how do they actually treat them? So, they are still, especially on the institutional investor side, there is still some more clarity that needs to be provided and also I would say a role on the institutional investors that needs to be played by looking at all of these regulations a lot more deeply and understanding how the other financial services providers are able to help them meet these regulations.
(12:42):
That said, financial services are also struggling around offering various products, especially the ones that involve yields and derivatives. We've seen some action come out of the US as well, some major findings that were brought out. Those kinds of things really set things back for both institutional investors and financial services.
(13:08):
The other barrier to adoption that we saw was custody. Investors cited their concern over being able to safeguard their own assets and understanding how to manage the counterparty credit risk. So that's a fair barrier to adoption, but I think it's just working with a custodian that is able to provide that institutional level offering is gonna be key for continued adoption. There are quite a few custodians that are coming up with their institutional offerings, both here in Canada, we have some qualified custodians as well as some of the major custodians from outside of Canada as well. So, really looking into how do you assess these custodians? How do you manage that counterparty credit risks? How do you manage the operations with these custodians? That's gonna be key to understanding for this barrier to be to be lifted.
(14:13):
The third one is price volatility. As we all know, crypto is quite volatile. I think a lot of that has to do with the whole, in the past, as we said, retail was the one that initially adopted crypto. We saw price moments based on some news or something that was on crypto Twitter. As we are continuing to see more maturity in the space and more institutions coming in, that volatility is actually settling down a bit. That being said, it is still volatile and crypto is still at the higher risk spectrum for asset classes. This does introduce the fact that crypto trades 24/7; that actually brings in additional market and operational risk as well as some enhanced liquidity and settlement requirements that need to be tackled.
(15:17):
So, while these concerns, we believe, will likely remain persistent in this year in 2022, we recognize that the cryptoasset industry will continue to mature with its various custodial solutions. We will get more regulatory clarity; we're hoping to get more regulatory clarity, especially from OSFI for banks in the space, to be able to provide some of these products and services. And furthermore, as more institutional investors enter the space, we know that traditional financial services will start to develop offerings to manage those demands as well. So, yeah, no, I think these are some of the various barriers to adoption that were cited in our report and I don't believe anything out of this comes as a surprise to us. I think it's just now, that these various institutions understand what are the barriers, it's about, recognizing how to manage these barriers and that's something that we've done a lot with our clients.
(16:22):
Yeah, and they've really started to talk about it amongst themselves to socialize it. I was just at a conference, a discussion room on crypto operational due diligence; really great panelists. One of the panelists said “We did something like this in 2019, 2 people were here. Now, this room is so packed, we've got people standing up.” 1 person is almost sitting on the floor. So packed; it was a big deal and one of the things that came up was “What about what about gray lists? What do you do there? Do you allow people to trade crypto because you're trading in it, and maybe you're trading in some of these new tokens that are going to come out. How do you work on that?” So, it's great that we're talking about it.
(17:03):
They don't quite have all the answers yet but, you know, these ops and compliance pros at the fund managers and investors are really looking at that. Some of them would say, “We don't really care about Bitcoin and Ethereum because it's hard to manipulate that it's so big but all the other ones are on the list for the do not trade or gray list”. Others that were strictly trading Bitcoin and Ethereum were saying, “No, no, we actually have these in our gray list.” So, depending on how they look at the market, they're developing their own solutions and it's great that the industry is just doing this.
(17:38):
Yeah, I think the great point for the regulators is that the regulators are more receptive to receiving applications and engaging with the institutional participants and the crypto native companies that are looking to offer services. We hope to see a lot more regulatory clarity come out of these discussions and we have quite a few forums like CAASA, we have the Canadian Blockchain Consortium, all of these are really trying to push the boundaries for Canadian regulatory clarity to be provided. And it really sets the precedent for other countries.
(18:22):
James, such a polarizing example and Kunal, thank you for a fantastic overview, really. As an aside, and it may be a bit of a glimpse behind the scenes of this podcast. I want to share one thing that I've noticed, particularly through the planning of this episode, and even just leading up to the recording. It's just the downright excitement that you all exhibit about the survey and its results. So, I was wondering if we could each, maybe take some time to talk about what the most interesting finding was in your eyes. James, as our guest of this episode, we'll offer you the floor first before then going to Kunal and then finally, Ken.
(18:56):
Thanks. There's 1 little chart there that I really like, I was interested in. Pretty surprising that 29% of the respondents are already allocating directly to crypto - that I thought was high ish, but maybe the sample, they're excited as well. But that's that's great to see. That's fantastic. That's obviously one way to get access. Regulated products at 50% really makes sense. Like I say for the reasons with the OSC hearing that getting through, getting access to these return streams through some types of ETFs or close-end trust or what have, you really can make a lot of sense.
(19:37):
On a personal note, if it's in your RRSP, then when you pass on, it goes to your wife and kids or your spouse and kids. That's fantastic versus not knowing necessarily where your keys are. The VC and hedge exposure, that's the next logical line, like I say, with our crypto venture panel that we had, that makes sense; that is where a lot of institutional investors already have investments in the venture capital space; soon the crypto area will probably mature to be more private equity. Maybe there'll be LBOs at some point here, but it's kind of going up and down the different waterfalls.
(20:13):
Given how high custody and the like are, the risk categories, you know, I thought it kind of made sense that the direct crypto access would be lower but, you know, all the other ones really make a lot of sense here especially like public equities too. That's kind of a no brainer. You are just buying a company stock, and even in the retail realm, buying a company’s stock is probably one of the easiest things to do, easier than a mutual fund sometimes because it has to get on the platform or getting directly into crypto. So these all made sense. I would say I was surprised at the direct cryptoassets access being so high.
(20:54):
Yep, I would say, one that really stood out for me was the investment thesis for institution investors. The maximum percentage of institutional investors cited DeFi services as their investment thesis for adopting crypto, which I thought was one really cool and second, that was very unexpected. You know, as a team, we've been working with DeFi quite a bit. We're actually doing demos with clients. So that really goes to show that institutional investors are interested just beyond investing in Bitcoin and Ethereum directly or indirectly, but they are also interested in the new generation, the stable coins and how they can actually leverage DeFi services. And now we have institutional offerings for DeFi out there as well, so I thought this was really, really interesting.
(21:57):
The other one that I wanna I want to highlight is, you know, one of the drivers of adoption, which our institutional investors cite was leadership buy-in. We couldn't agree more; we had to go through that same cycle as part of our 8 or 9 month long journey to get Bitcoin and Ethereum on our Treasury. We had to get to a lot in order to get that leadership buy-in, but I think that really, really pushed us to do all our due diligence in the right manner to get there.
(22:29):
Kunal, think you nailed it there. I was just going to mention that, you know, one of the interesting facts that I found in our survey was that most of the participants have a neutral or positive view towards crypto. As Adam mentioned earlier with our public announcement that KPMG allocated Bitcoin and Ethereum to our balance sheet, I think it further support supports that point given that it was so well received amongst all institutions and within the media itself. So, I think, you know, this is very optimistic. It keeps me bullish. I think we'll see a lot more a lot more institutions adopting crypto in the near future.
(23:07):
Love the optimism. I love the passion that you all have. It's all over these responses, and it is so great to hear. So to wrap up today's session, I really want to end on a well, it's a rather large question for our group. It's really because there is no doubt that crypto is here to stay. So the question pertains to organizations and what they can do to get involved. Kunal, do you want to start us off?
(23:31):
Yeah, absolutely I think the first thing that we tell our various clients that we work with is if you want to stay relevant in the next 5 to 10 years, you really need to know how crypto impacts your business and how you can get involved. This is not only like financial services and institutional investors, but also industries outside of these too because, you know, crypto is here to stay as you said, and it is becoming an investable asset class.
(24:06):
It is going to continue to see that growth as an investment but also, we'll see growth of the likes of stable coins and other kind of cryptoassets, which will play a large role in how we transact with each other, how we transact with companies, so it's no longer just limited to institutional investors and financial services, but any organization that's out there, whether you're a charity, whether you're a business static that wants to accept crypto assets as payment. You know, there are lots of opportunities out there and the first question really is “How does this impact us and how can we engage, how can we take advantage of this new asset class that's booming?”
(24:55):
Yeah, I liken it to kind of like the Internet. I mean, many have obviously, I think now, on the adoption basis, it's about 1998, which we know what happened. Then 1999 was huge for Internet stocks and then there was a TMT crash and such, so there will be volatility in this. But, I mean, with that though, what you, what you got out of the Internet and the worldwide web was not just a website. It was really a way of doing commerce without having to send faxes and just free transfer of information. This is, you know, with these Ethereum being the world's biggest supercomputer, then you have Bitcoin, being inflation proof, money or currency, I kind of call it a store of currency right now because at some point, we'll be able to actually use it in a meaningful way like, they are in El Salvador.
(25:43):
I think if folks go to, and this is a little self serving, because we have like a whole training date at our digital conference where people can learn a lot about it (Kunal of course, has been presenting at it over the last while too) just try to figure out where they can fit within this versus a blanket statement of “This is a scam, or this is the best thing in the world.” There's, there's some place, I think, for many businesses, many industries, whether it's mining it or, like like the old 849; providing the picks and shovels to the miners and such and all the other ancillary services around it. So, I think it behooves most, if not all companies to, to see how they can fit into this.
James, I think that's a great point. You know, I think most institutions and corporations out there need to keep an open mind about cryptoassets and it really starts with education (26:27):
understanding all the complexities that crypto has and also getting that first hand experience will really open their mind to the opportunities within the crypto ecosystem. And I think, you know, going forward, even retail investors are likely to continue rapidly adopting crypto assets.
(26:51):
So, you know, within DeFi, NFT, and GameFi sectors, they'll all continue to bring new participants to the space, and we can talk about this trend in our next episode when we turn our focus to NFTs, GameFi, and [the] metaverse, but this is something that will push additional financial institutions and institutional investors to learn more about.
Yep, I, I think, you know, Ken, one of the points that you mentioned was spot on - the hands on experience. The way for even us to get that leadership buy in as KPMG in Canada engaged with crypto was to get our leadership hands on experience working with hardware wallets, interacting with DeFi services, transferring crypto, buying crypto, being able to custody crypto as well. We had to get that hands on experience for them to really understand the power of this, this technology, this innovation. I think that's gonna be key.
(27:49):
One of the things that I want to mention is DeFi. We're gonna have a whole separate episode on it, but given the the stats that really stood out for me, I think institutions that want to experience, or at least see first hand the experience of how one uses DeFi applications. Our Treasury initiative has now allowed us to actually engage and give live demos of these DeFi applications as well. So, I think that's been proving really, really helpful for a lot of institutions to wrap their head head around what DeFi is, how to engage with this, and how can they actually get more use out of out of this as well. So, it's a really exciting time for us as a practice and for the whole crypto community as a whole and we just want to play a part in promoting the community across the globe, not only in Canada.
(28:42):
Gents this has been great, but unfortunately, we are out of time for today's episode. To wrap, I would like to extend a big thank you to Ken, Kunal and James for joining me today. We appreciate it very much.
It’s been great. Thanks a lot.
Thanks Adam.
Thanks, Adam. This has been great. And I think we'll have some great discussions in the future as well.
Absolutely, and in addition to these awesome guests, I would also like to extend a big thank you to our loyal listeners. Stay tuned for a brand new episode next week when we will dive into all things NFT. Bye for now everyone!
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