View from Africa: Appetite for digital assets keeps growing steadily
In March 2023, Metaco attended The Network Forum South Africa in Johannesburg, where leading custody, settlement and post-trade industry experts shared their insights into what is happening in the institutional digital asset market. The overarching conclusion of the various discussions: despite the challenging headwinds facing the asset class, institutional and retail investor appetite for digital assets across the spectrum is holding up.
Crypto currencies demonstrate their resilience
Culminating in the shock collapse of FTX – once considered to be an industry leading crypto-exchange – 2022 was not a great year for crypto currencies. FTX’s sudden demise followed a succession of failures at several crypto lenders and crypto hedge funds, in addition to the blow up of the TerraUSD stablecoin. Despite more recent events – namely the collapse of three high profile crypto-lenders – Silicon Valley Bank (SVB), Signature Bank and Silvergate Bank –, and US SEC’s crackdown on world’s largest crypto exchanges Coinbase and Binance, crypto-currencies are actually thriving, with Bitcoin having rallied c. 60% this year alone. Bitcoin’s resilience is demonstrable proof that crypto currencies could be a safe haven asset during bouts of volatility – especially as concerns mount about the health of the banking system following the hastily arranged marriage between UBS and Credit Suisse.
Zooming in on Africa, interest in crypto currencies among retail investors has been buoyant especially in South Africa, Kenya and Nigeria. In addition to providing retail investors with new sources of returns, experts at The Network Forum Africa Meeting said that many people on the continent are increasingly leveraging crypto currencies to make cross-border remittances and payments, as they are more frictionless than traditional channels.
There is strong demand from retail clients for digital assets, including crypto currencies. In time, I anticipate institutional investors – including pension funds and asset managers – will increasingly want to participate in the market.
said Bradley Johnson, Sales Director, Africa at Metaco.
Other digital assets start to gather momentum in Africa
Beyond crypto currencies, asset tokenization is also gathering traction, with the experts at the conference anticipating the market could eventually reach $350 trillion in size in the near-term. Through tokenization, assets – including regulated traditional securities (equities, bonds) and illiquid financial instruments (i.e. real estate, private equity funds, commodities, fine wines, etc. ) can be digitalized and fractionalized on distributed ledgers, making them cheaper for retail investors to buy. In African markets where financial inclusion is limited, asset tokenization could help democratize investment. This, according to the experts present at The Network Forum, could provide a liquidity boost in markets which have previously been illiquid.
Central Bank Digital Currencies (CBDCs) were also discussed at length during the event. Within Africa, Nigeria has already launched its own proprietary CBDC – the eNaira – while South Africa and Ghana are also piloting their own CBDCs. So what are the benefits of CBDCs? Retail CBDCs could help reduce the cost of transferring money overseas, while wholesale CBDCs have the potential to expedite cross-border trade settlements, and may even one day facilitate atomic settlement. Citing the work being done by the Monetary Authority of Singapore (MAS), an African-based regulator speaking at TNF said that some authorities are exploring the idea of purpose bound money (PBM), a concept whereby retail CBDCs have in-built restrictions limiting how they can be spent by individuals. The regulator warned PBMs could prove divisive though. For instance, the regulator said that while a social grant paid out in PBMs could be programmed to prevent individuals from buying alcohol or illicit goods, such mechanisms risked facilitating authoritarianism.
The pivot to strong counter-parties
Recent events are likely to shore up the position of global banks, as they increasingly lend to innovative and promising technology start-up companies, according to Metaco’s Bradley Johnson. The respective failures of SVB, Signature Bank and Silvergate Bank have since sparked a flood of deposits into major financial institutions. For example, the decision by HSBC to acquire the UK arm of SVB has subsequently led to SVB UK’s deposit base swelling to about £7 billion, as clients increasingly park assets in institutions they perceive to be safe. He added:
The run on these banks, whose client base comprised mostly of technology and crypto companies, is an opportunity for established financial institutions with big balance sheets, who are also our main clients, to move in more aggressively and start offering services to start-up technology companies.
As more institutional clients slowly start building up their exposures to digital assets, they are increasingly looking to traditional financial institutions for support. Having witnessed a number of crises and high-profile hacks unfold at various crypto exchanges, many investors do not want to safekeep their private keys at with said venues which they perceive to be unregulated or badly risk managed. A study by Fidelity Digital Assets, for instance, found that 35% of institutional investors said that security concerns were the biggest obstacle preventing them from trading digital assets. Accordingly, some traditional custodians are starting to enter the market.
More global banks are starting to leverage their brands to offer digital asset services including custody.
Traditional banks are in a strategically strong position to assist clients who are looking to trade digital assets. Firstly, major banks have the added advantage in that they can cater to clients who are trading both traditional securities and digital assets. At a time when margins are being squeezed, some clients will be reluctant to appoint different providers to service their traditional and digital asset portfolios, preferring a consolidated solution instead. However, banks do face some challenges. Although banks can potentially offer excellent security when custodying digital assets, this cannot come at the expense of agility, a traditional strength of the fin-techs. However, some banks are finding themselves in a dilemma as to whether they build the technology stack to service digital assets themselves, or bring in external help. Increasingly, banks are looking to leverage the best of both worlds by engaging with technology firms which have extensive experience supporting digital assets.
Regulation of digital assets starts to take shape
Without intelligent and proportionate regulation, the digital asset market will struggle to take off.
The digital asset markets which are thriving are the ones where there are solid regulations in place. These include the EU – which has introduced MiCA (Markets in Crypto Assets Regulation) – together with Germany, Switzerland and Singapore,”
South Africa has followed suit by introducing regulations, partly in response to two high-profile scams which originated in the country. One speaker at TNF stressed that the push to regulate digital assets in South Africa was primarily driven by the need to protect retail investors, but also by mounting concerns about the growing interconnectedness between the digital asset marketplace and the traditional financial system. South Africa has adopted rules similar to other markets, especially the EU.
So what is South Africa doing exactly? The Financial Sector Conduct Authority (FSCA) has said that crypto assets will now be classified as being financial products, while companies that trade digital assets will be required to obtain a license from June 2023. Additionally, these rules will also apply to firms which provide advice or intermediary services to market participants transacting digital assets.
One expert noted that while South Africa is bringing in more supervision of digital assets and their service providers, it is not attempting to regulate the underlying technology underpinning these assets.
“In response, more tier one banks are now turning to external technology platforms such as Metaco, which have the infrastructure and expertise to help custodians go to market with digital asset custody solutions in a way that is fast, safe and compliant.”
Where do digital assets go from here?
Appetite for digital assets throughout Africa has grown over the last few years. However, if the market is to become mainstream and institutional, then it needs to be buttressed by strong banking service providers and robust regulations. Without these, digital assets will struggle to reach their full potential.
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