Head of Digital Asset Strategy at T. Rowe Price [NASDAQ: TROW]

Blue Macellari

After Crypto Winter Institutions Take Center Stage

Blue Macellari

As the head of digital asset strategy for a large asset manager, I view digital assets and blockchain technology through two distinct lenses. On one hand, I think about this emerging technology as investors approaching a new asset class, and I also think in terms of the operational potential for our firm and the broader industry. These two perspectives are not as siloed as one may imagine – similar to 30 years ago when asset managers began thinking about both how to invest in internet-related opportunities and how to use the internet. As institutional engagement in digital assets continues to accelerate, I believe we will see increasing convergence of these perspectives in our industry.

To be sure, digital assets can be a polarizing topic. A look back over the past 12 months of headlines certainly justifies a healthy skepticism. Beginning in the summer of 2022, a series of increasingly serious failures roiled the crypto industry, starting with Terra Luna and 3AC, and culminating with FTX. And while the past year has been a difficult secular backdrop for crypto assets, commonly referred to as “crypto winter,” we’ve also seen the emergence of the initial essential elements for a path to maturation of the digital assets space. Since the collapse of FTX in late 2022, regulators in nearly every major financial center around the globe have developed a comprehensive regulatory framework, including the UK, EU, Singapore, Hong Kong, the UAE, and Brazil. Large, traditional asset managers and financial intermediaries are increasing their engagement, with a May 2023 Citi survey of financial markets intermediaries finding that that the number of firms working on blockchain and digital assets projects grew from 47% in 2022 to 74%.

It is still very much ‘early days’ for the digital assets
industry and the development of on-chain finance, and it has been an
unusual and volatile path thus far.

Digital assets have the potential to transform key aspects of institutional asset management over the next decade – from tokenization of financial assets to tokenized fund distribution, to reduced counterparty risk and instantaneous automated settlement (also known as ‘atomic settlement’). As of this year, according to the Bank for International Settlements, 93% of central banks were exploring, developing, or piloting Central Bank Digital Currencies (nearly all of which are being developed on public blockchains). Monetary Authority of Singapore’s Project Guardian now has 17 of the world’s largest financial institutions (including T. Rowe Price) as part of the industry group participating in the testing of regulatory compliant use cases building on public, interoperable blockchains. With asset managers playing a larger role, the tokenization of assets and funds on public blockchains has emerged as a leading use case, and one that we’re particularly well-suited to evaluate from both an investment and operational perspective. Put diﬀerently, looking across the financial services industry, if there is a compelling operational case for institutions to utilize and build on public blockchains, isn’t a natural corollary to ask whether this translates to a compelling investment case worth analyzing?

It’s important for asset managers to be truly ﬂuent in this emerging space, building institutional knowledge and hands-on experience across the firm from Investments to Operations to Compliance. The approach T. Rowe Price has taken is to combine the agility of a ‘start-up’ with the expertise and resources of a leading established asset manager. With an emphasis on building digital asset expertise as it relates to business groups across the firm, we’ve brought together cross-functional teams to tackle complex issues and questions unique to digital assets such as secure custody and the development of processes and controls for an asset class characterized primarily by bearer instruments, where finality in settlement is measured in minutes rather than days.

It is still very much ‘early days’ for the digital assets industry and the development of on-chain finance, and it has been an unusual and volatile path thus far. It’s a market whose growth has, until recently, been driven almost entirely by direct retail participation, without a clear or harmonized regulatory framework, and most notably without the participation of institutional asset managers that bring rigorous investment standards, thoughtful asset allocation, and long- term investment horizons to the markets they participate in. While 2022 was defined by high- profile failures in the ‘wild west’ of crypto, 2023 has seen institutions taking the lead on both the investment and operational fronts – in most cases the result of work that had been underway over the past two years. As established institutions play an increasing role in digital assets, I believe the sector as a whole will benefit from a shift towards more responsible innovation.

The articles from these contributors are based on their personal expertise and viewpoints, and do not necessarily reflect the opinions of their employers or affiliated organizations.