The emergence of a new asset is a once-in-a-generation golden opportunity for investors. After the first meltdown, crypto is hot again, and TradFi has big plans for it.
The predicted yet unexpectedly swift approval of Ethereum ETFs by the SEC marks a new wave of institutional adoption of digital assets. It amplified the effect on the market from the BTC rally and the debut of its ETF, launched by TradFi heavyweights like Grayscale and Blackrock.
Renewed optimism is fostering increased cross-flows between institutions and the digital asset sector. BNY Mellon is expanding its digital assets team. State Street plans to introduce crypto custody services. Franklin Templeton is considering launching a new crypto fund targeting tokens beyond Bitcoin and Ethereum.
Franklin Templeton Weighs New Crypto Fund Investing in Tokens Beyond Bitcoin, Ether: Report https://t.co/I8xVuqEplm via @coindesk
— Siciliano38 (@Sicilliano38) June 22, 2024
Paradoxically, a shift in mainstream acceptance of crypto as a legitimate asset class, propelled by institutions that were to be replaced by innovations, stemmed from the crypto community. If “don’t fix what isn’t broken” were a case for crypto, the flood of VC would continue its flow, but it has altered significantly.
Annual VCs inflow fell from $14.6 billion in 2021 to $9.6 billion in 2022. In 2023, it plummeted to $1.62 billion, an 83% crash YoY. So what are the new directions?
CeFi Re-Focusing
In Q1 2024, crypto showed signs of recovery. Total VC funding surged by 40% to Q4 2023, reaching $2.4 billion. For the first time since 2022, it exceeded $1 billion for two straight months. In contrast, crypto CeFi funding does not fall into the same basket. In total, startups attracted $232m, a 58% yoy drop from Q1 2023 ($553 million) and 59% less than in Q4 2023 ($572.21m).
Historically, VC flagship projects were indicators of market trends. Funding patterns indicate that crypto CeFi is undergoing a refocus. In Q1 2024, investors funded 13 types of projects, a sharp decline from 31 in 2023 and 54 in 2022.
In 2022 and 2023, CeFi funding diversified across multiple areas, covering widely recognized categories like social trading and extending into analytics, taxes, and accounting. In 2024, funding was primarily curtailed to digital asset management, exchanges, trading, liquidity, payments, and custody. Promising or hype-wheeled projects are no longer prioritized for the A-list.
In other words, venture capital’s center of gravity is shifting towards projects that integrate crypto-native financial environments with TradFi frameworks, which have been shaped by the financial industry’s experiences with crashes, bubbles, and overpromises. Who are the survivors of crypto-drought?
Clearing, Custody, and Regulatory-compliance
In Q1 2024, ClearToken attracted a $10 m seed round. It intends to be fully regulated in the UK and has initiated the process of obtaining clearing house recognition from the Bank of England. The seed round was co-led by FlowTraders, a crypto-trading firm with strong ties to TradFi.
Securitize raised $47m in a strategic round involving BlackRock to further develop a regulatory-compliant platform for issuing and trading digital asset securities. Though the details of funding for FireBlocks, BitGo, HQLAX, and EDX Markets are undisclosed, among their investors are Haun Ventures, HSBC, BNP Paribas Securities, BNY Mellon, and other prominent TradFi veterans.
#Binance teams up with @Mastercard to launch a new prepaid card in Argentina, bringing crypto payments into the region 🇦🇷
Users can enjoy:
🔸 Making purchases in crypto (#BTC, #BNB & more)
🔸 Up to 8% in crypto cashback
🔸 Zero fees on ATM withdrawals— Binance (@binance) August 4, 2022
This trend is reinforced by the ongoing expansion of traditional finance players into the digital assets realm. PayPal is preparing to launch its own on-chain stablecoin, while Mastercard begins its foray into peer-to-peer crypto payments in Argentina, Brazil, Chile, France, Guatemala, Mexico, Panama, Paraguay, Portugal, Spain, Switzerland, and Uruguay.
Bridging the Trust Gap
The green light for crypto-related vehicles marked two strong trends, whetting institutions’ appetite to embrace crypto for the long term. First, it became the fastest-growing ETF sector in history. Whilst the real outcomes to measure institutions’ involvement are on a 6-12 month horizon, it undeniably reversed the setting for bridging crypto and TradFi.
#Bitcoin ETFs were (finally) just approved for trading tomorrow, after ten years. Maybe the politics in Congress around cryptocurrency will get better once they realize it’s backstopping pension funds and retirement accounts.
— Edward Snowden (@Snowden) January 10, 2024
Second, and much more importantly, it boosted its legitimacy, which means investors have a once-in-a-generation opportunity when a new asset class emerges. Probably, the last one was years ago, when the market witnessed the emergence of FX derivatives.
To seize the moment, the market cannot remain in the “bundling” mold, whereas activities are concentrated in a single point. TradFi market setups, with distributed risks and conflicts of interest resolved, maybe the benchmark that crypto needs to scale and build trust. In short, “unbundle” to grow.
