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Major financial institutions (FIs) and tech firms are investing heavily in startups building technology to develop the crypto market, despite steering clear of investing in the nascent asset class themselves,reports Reuters.
Business Insider Intelligence
So far this year, crypto and blockchain startups have secured $850 million across 13 deals in VC funding, including funds from corporates, per PitchBook data. That figure puts funding for the segment on track for a second consecutive annual record following the fivefold year-over-year spike in investments in 2018, where $2.4 billion was raised across 117 deals.
Here’s what it means: Bets on firms in and around the crypto space suggests major FIs remain torn about the technology.
- The hype around blockchain within financial services has appeared to be waning recently. Challenges in adopting the tech for commercial use, relatively narrow applications, and regulatory worries are among the key issues stymieing this promise. Bank of America (BofA) Tech and Operations Chief Cathy Bessantrecentlyvoiced doubt on the benefits of the technology for instance, despite the 82 patents it’s received or applied for — the most number of patents for the technology among FIs.
- But the latest funding figures belie this worry. We’ve seen a number of major players make bets on startups: The London Stock Exchange (LSE), for example, recently led a $20 million seed round inNivaura, a startup that aims to use blockchain to automate capital markets processes, with participation from Spanish banking giant Santander. Meanwhile, just last week, blockchain-based compliance startupChainalysis secured $6 million in funding from Japan’s Mitsubishi UFJ and VC firm Sozo Ventures.
- The potential of tokenization to upend existing processes is likely driving the investment uptick.Much of the investment action is happening around tokenization — the process by which conventional assets like stocks or oil are represented on blockchain — according to Anton Ruddenklau, global cohead of fintech at KPMG, cited by Reuters. To this end, Microsoft and the Enterprise Ethereum Alliance (EEA) recentlyannounced a collaboration, dubbed the Token Taxonomy Initiative, aimed at helping firms meet their tokenization needs. Members of the group include a number of major FIs like JPMorgan, Santander, and ING.
The bigger picture: We expect FIs to keep pouring investments into the tech, not least because it offers them an opportunity to have skin in the game, while freeing them from commitment.
Investing in startups enables FIs to bridge the enduring tension over blockchain’s potential.Despite heavy investments in blockchain, FIs have struggled to move these projects from testing to large-scale rollouts. The result has been increasing sentiment that little has been delivered from the large investments.
At the same time, the promise of the technology, coupled with the constant pressure on FIs to keep up with developments shaping the future of the industry, makes walking away from blockchain particularly challenging.
The contradiction between BofA’s numerous patents and Bessant’s skepticism is a prime illustration of this tension. Investing in startups like Nivaura and Chainalysis, in this regard, offers incumbents a route to meeting these competing demands: It allows them to have stakes in promising projects without having to bear the brunt of the developmental costs. We think it’s likely investments in startups in the space will surge even more as FIs look to hedge their bets on the tech.
Here’s an industry opinion, as told to Business Insider Intelligence:
“It quickly became apparent to FIs that the broad market infrastructure for digital assets was still too immature to meet their needs, so it’s no surprise that this part of the sector is attracting so much new investment. Names such as Fidelity and ICE will engender broader trust, but these solutions are merely a mirror of the existing world. It remains to be seen whether it’s the incumbents or the startups that bring about real innovation once blockchain technology starts to mature and becomes ready for prime time.”— Paul Gordon, Coinscrum founder and director
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