5 minute read 10 May 2023
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Staying the course: institutional investor outlook on digital assets

Authors
Sara Elinson

EY Americas FinTech M&A Leader and EY Americas Payments M&A Leader, Ernst & Young Capital Advisors, LLC US Financial Technology Investment Banking, Senior Managing Director

FinTech strategist and ecosystem builder. Helping FinTech companies and incumbents advance digital financial services through investment, M&A and partnerships.

Prashant Kher

Senior Director – Digital Assets Strategy Lead, EY-Parthenon, Ernst & Young LLP

Innovative leader working with financial services firms on strategy development. Helping financial services firms develop their Web 3 and digital asset strategies and digital asset firms drive growth.

5 minute read 10 May 2023
Related topics Financial Services Blockchain Strategy by EY-Parthenon Strategy and Transactions
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EY-Parthenon research suggests institutions believe in the long-term value of blockchain and digital assets despite recent market activity.

In brief

  • Institutions believe in the long-term value of blockchain and crypto/digital assets.
  • Allocations to digital assets and digital assets related products are expected to increase.
  • Institutional investors are interested in tokenized assets, as well as tokenizing their products.

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.

How EY-Parthenon can help

Crypto and Digital Assets

EY offers an experienced, multi-disciplinary team that is prepared to assist you in driving toward business opportunity while recognizing the potential risks of not following a thoughtful, informed approach. Our team draws on best practices from serving both traditional financial services firms (across all sectors) and the emerging, digital natives.

Read more

Show resources

  • Download the full article on: Staying the course institutional investor sentiment toward blockchain and digital assets

    pdf (6 MB)

Allocation to digital assets and digital assets related products

Investors overwhelmingly believe in the long-term value of blockchain and/or digital assets despite recent market events.

Digital asset institutional investors are:

*Digital asset-related products include funds, trusts, derivaties, etc.

  • Chart description#Hide description

    A series of eight pie graphs comparing the percentage of digital asset investors that believe in the long-term outlook of the market, are interested in increasing their allocations, are more trusting of Traditional Finance institutions, and are interested in tokenization.

Institutions are moving forward with their plans to invest optimistically and cautiously, with the majority of those that are currently invested allocating 1% to 5% of their portfolios to digital assets or related products. Seventy‑six percent of respondents who have invested in digital assets suggest portfolio allocations below 5%, with only 3% of respondents allocating above 20% of their portfolios. Given their risk-on nature, hedge funds are a notable exception, with 36% of respondents allocating above 5% of their portfolios to the asset class.

In addition, 71% of respondents with AUM/AUAs <$1b indicated they allocate >1% of their portfolio to digital assets vs. 60% of all respondents, while only 45% of institutions with >$500b in AUM/AUA indicated they allocate more than 1% of their portfolio.

Looking to the future, institutions overwhelmingly expect to increase their allocations, with consistent growth expected in 2024 or 2025, aligning with the generally cautious but optimistic approach.

Spot cryptocurrency represents the most common investment, with bitcoin (BTC) and Ethereum (ETH) being the most prevalent. It is important to note, however, that 60% of institutions invested in spot cryptocurrency currently are also invested in cryptocurrencies beyond BTC and ETH. Going forward, spot cryptocurrency remains the most popular method for exposure, but as we look toward 2025, institutions expect to allocate more to other vehicles, notably “funds that are tracked to crypto” and “private equity/venture capital (PE/VC)-style investments” in digital asset firms.

How EY-Parthenon can help

Blockchain consulting services

Blockchain is a decentralized ledger of each transaction that occurs across a network, enabling the decentralized exchange of trusted data.

Read more

  • Chart description#Hide description

    A stacked bar graph comparing the percentage of funds a respondent has allocated to cryptocurrencies, digital assets, or related crypto funds/products but firm type and value of the asset. The data shows that respondents allocated more to 1%-5% of their funds.

Interest in tokenization

Tokenization is the process of converting an asset or the ownership rights of an asset to a digital form using blockchain. Tokenization of assets offers many benefits, including enabling access to new customers and sources of capital; increasing liquidity; supporting fractionalization; enabling the removal of intermediaries from the settlement process; reducing market friction; driving operational efficiencies; lowering costs; automating processes through smart contracts; and much more.

When it comes to tokenization, there are two sides: investing in tokenized assets and tokenizing one’s own assets. Fifty-seven percent indicated an interest in investing in tokenized assets, particularly tokenized private funds, securities (e.g., bonds and stocks), and public funds. Hedge funds are the most bullish on their timeline to begin investing. Among institutions who are interested in investing in tokenized assets, public funds, securities, and private funds hold the most interest.

Institutional investors are interested in investing in tokenized private funds and securities (e.g., bonds, stocks) the most, citing access to new asset types, increased liquidity, and increased transparency as primary drivers for their interest.

Institutional investors are interested in investing tokenized private funds and securities (e.g., bonds, stocks) the most, citing access to new asset types, increased liquidity and increased transparency as primary drivers for their interest.

  • Chart description#Hide description

    1. A bar graph comparing the survey response results of the asset classes or security types a respondents firm would be interested in tokenizing. Among hedge funds and asset managers, the asset classes or security types being prioritized first include real estate funds, securities, private funds, public funds and loans and mortgages.
    2. A size comparison bubble graph comparing the top three considerations a respondent’s firm says excites them most about tokenizing their assets. New investors and new capital are the primary reason for respondents to tokenize assets, increased liquidity and operational efficiencies were other top reasons for institutions interested in tokenizing their assets.

Forty-seven percent of hedge funds and institutional asset managers are interested in tokenizing their own assets. Primary rationale for tokenizing assets include access to new investors and capital, and increased liquidity (53% and 47% of respondents, respectively). Top asset classes or security types of interest include public funds, private funds and real estate funds, and 60% of institutions surveyed would tokenize on a public-permissioned blockchain.

Institutions interested in tokenizing assets are most interested in tokenizing public funds, private funds and real estate funds.

Besides access to new investors and new capital as the primary reason to tokenize assets (53%), increased liquidity (47%) and operational efficiencies (40%) were other top reasons for institutions interested in tokenizing their assets.

  • Chart description#Hide description

    1. A bar graph comparing the survey response results of the asset classes or security types a respondents firm would be interested in tokenizing. Among hedge funds and asset managers, the asset classes or security types being prioritized first include real estate funds, securities, private funds, public funds and loans and mortgages.
    2. A size comparison bubble graph comparing the top three considerations a respondent’s firm says excites them most about tokenizing their assets. New investors and new capital are the primary reason for respondents to tokenize assets, increased liquidity and operational efficiencies were other top reasons for institutions interested in tokenizing their assets.

Survey respondent profile – A total of 256 decision-makers from buy-side firms operating around the world were surveyed. Investors surveyed came from different segments within the buy-side and varied in asset size.

Click on the chart modifiers to the right of the chart to group the data by firm type, region, total AUM/AUA or executive role.

  • Chart description#Hide description

    An interactive charting graphic displaying four types of survey respondent demographic data. Data by firm type is a pie graph, assets under management or assets under administration is a bar graph, region is a comparison bubble graph overlayed on a global map, and job title is a stacked bar graph. The data shows a good mix of respondent types with the largest response pools being from the US and aua/aum valued at less that $1b.

  • Show references#Hide references

    1Digital assets include cryptocurrencies, stablecoins, tokenized assets, non‑fungible tokens (NFTs), and other digital representations of value.

Summary

Most institutional investors believe in the long-term value of blockchain and crypto/digital assets, and plan to scale digital asset investments over the next two to three years. Investors are also interested in investing in tokenized financial assets, and institutions are actively exploring tokenizing their own assets.

About this article

Authors
Sara Elinson

EY Americas FinTech M&A Leader and EY Americas Payments M&A Leader, Ernst & Young Capital Advisors, LLC US Financial Technology Investment Banking, Senior Managing Director

FinTech strategist and ecosystem builder. Helping FinTech companies and incumbents advance digital financial services through investment, M&A and partnerships.

Prashant Kher

Senior Director – Digital Assets Strategy Lead, EY-Parthenon, Ernst & Young LLP

Innovative leader working with financial services firms on strategy development. Helping financial services firms develop their Web 3 and digital asset strategies and digital asset firms drive growth.

Related topics Financial Services Blockchain Strategy by EY-Parthenon Strategy and Transactions
Upvote