The budding market for
Demand for the kinds of financial products developed by blockchain specialists is significant, according to new research from the Oliver Wyman Forum. Forty percent of the 11,000 respondents in a recent 11-country survey said they were interested in trading in financial markets without intermediaries and using independent systems outside of banks. What's more, 36% said they were interested in new investment opportunities such as tokenized assets, and 29% expressed interest in using blockchain-based borrowing and lending platforms.
The problem for upstarts is that consumers place much less trust in the entities that have pioneered blockchain-based innovations in those areas than they do in banks. That may reflect reputational contagion from the collapses of crypto entities such as stablecoin issuer Terraform Labs and the FTX exchange.
Partnerships between traditional financial firms and blockchain providers can be a win-win. For digital newbies, linkups with established firms can provide the trust consumers seek. For banks and finance firms, partnerships can help them enter potentially lucrative new markets — and give them access to younger consumers before upstarts win them for good. Those aged 18 to 44 are more than twice as interested in some types of blockchain-based financial innovation as older consumers, according to the survey, and don't have as much of a trust preference for banks over fintechs and crypto platforms.
Until recently there was little direct competition between banks and crypto native firms, but that changed with the introduction of bitcoin ETFs. The line between conventional and blockchain-based finance looks likely to blur further going forward, particularly following the approval of ETFs holding ether, the second-largest cryptocurrency, behind bitcoin.
A number of banks and conventional asset managers have begun turning bonds, deposits, money market funds and other assets into tokens that can be traded on blockchains. Tokenized assets were estimated to be worth around $6.5 billion in 2023, but some forecasters say the market could surge to $4 trillion or more by 2030.
To capitalize on that growth, traditional firms need to overcome the so-called innovator's dilemma: Banks, brokerages, and other established players would have to disrupt longstanding business relationships and layers of legacy technology to fully capture the speed and efficiency of blockchain and develop a broad range of innovative new products.
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Thus far many traditional firms have focused their blockchain efforts on cutting costs. Partnering with blockchain natives can help these institutions focus on growing revenue by creating new products and markets.
Consider bitcoin ETFs. Eleven firms, including some of the biggest traditional asset managers, launched their ETFs in the United States in early January after digital assets native Grayscale Investments opened the market by winning a lawsuit against the Securities and Exchange Commission. Most of the funds enlisted a crypto exchange as custodian to safeguard their bitcoins. The combination has proved popular, with the ETFs attracting more than $12 billion of net new investor money in the first quarter of 2024.
This collaborative model has broad potential. In November, the Monetary Authority of Singapore announced
Collaboration doesn't have to be a one-way street. Consider stablecoins, or cryptocurrencies whose value is pegged to another asset, typically the U.S. dollar. Many issuers, facing demands for greater transparency following the collapse of TerraUSD in 2022, have turned to traditional financial institutions to custody their reserve assets and provide audited reports. That's a significant opportunity, considering the stablecoin market has roughly $150 billion in reserve assets.
What makes for a good collaboration? First and foremost, a compelling use case — the creation of a utility or service that's better than existing alternatives and that any one firm can't provide on its own. In the case of bitcoin ETFs, the hook was to combine exposure to bitcoin with a regulated and well-known financial vehicle.
The ability to access new technology and customers — and perhaps establish a new brand — also play a critical role in successful collaborations. And it needs to be a genuine partnership, one that draws strength from and provides value to each of its members. Blockchain lends itself well to collaboration because it's a network technology, and networks become stronger as they grow.
A more open, innovative and accessible financial system should be in everyone's interest. Greater collaboration between traditional financial institutions and blockchain natives can get us there.
