In an industry known for its volatility, 2022 was a banner year for digital assets1 — with numerous headlines, TV talk segments and podcasts devoted to the developments. On one hand, we witnessed a complete shift in the landscape of players, including the collapse of some of the most well-known firms, as well as a historic erosion of value and an increase in regulatory enforcement actions. On the other hand, we saw, and are continuing to see, the first meaningful institutional-grade implementations of blockchain technology by major traditional finance (TradFi) organizations, including the launch of digital asset custody, launch and usage of tokenized deposits and settlement coins, numerous central bank digital currency (CBDC) pilots, settlement of digital bonds on public ledgers, tokenization of private funds, intraday repo transactions occurring on the blockchain, and expansion of numerous use cases supporting payments and money movement. In addition, many TradFi organizations continued forward in their build-out of digital asset offerings for their retail and institutional clients.
Given this shifting backdrop, an EY-Parthenon team conducted a survey of 250-plus institutions on their sentiment, use and plans regarding blockchain and digital assets. Our findings suggest they are staying the course and are not moving away from crypto/digital assets, but are approaching their investments carefully with educated, tempered optimism. Institutions overwhelmingly believe in the long-term benefits of crypto/digital assets, and their abundance of caution stems primarily from concerns regarding regulatory uncertainty, identification of trusted institutions to partner with, and the need to ensure security and safe custody of this novel asset class.
Institutions see value in the ability to diversity assets, as well as the potential for asymmetric returns when investing in crypto/digital assets. Thirty-five percent of respondents noted allocating 1%-5% to digital assets and/or related products, with 60% of respondents indicating they allocate more than 1% of their portfolio to digital assets and/or related products. While respondents with smaller assets under management (AUM)/assets under administration (AUA) tended to allocate a greater portion of their portfolio to these products, it was noteworthy that 45% of institutions with more than $500b in AUM responded that they allocate more than 1% of their portfolio, suggesting a large amount of capital invested in the space by traditional institutional investors.
To enable appropriate safeguards and plans that can be built, investment time horizons have been extended, with most organizations planning to scale investments over the next two to three years. However, institutions see tokenization as highly promising, and are looking to move more quickly toward investing in tokenized assets, as well as tokenizing their own assets over the next two years. Hedge funds, in particular, are the most bullish on their timeline to begin investing.