A year in review and a look to the future. What will 2020 hold for the industry? Who are the firms to watch?
TL;DR: There will be consolidation in 2020 among service providers. Regulators will use Telegram and Facebook as testbeds. Copper will continue to grow and remains bullish about the year ahead!
In 2019 many businesses were created offering digital asset orientated technology and/or services to the world of institutional investors, in many cases without a solid enough understanding of financial institutions and their requirements. For the most part, they were offering solutions for what institutions could be in 2-5 years – not what they are and need today. Without a true appreciation of what institutions do well, what they need to improve on, and their general day-to-day processes, these businesses will not succeed.
While many institutional investors have similar goals, each has their own individual needs, strategies, and the problems they encounter are diverse. We have seen a step in the right direction in 2019, but we have also seen a large number of firms missing the mark by not adequately understanding their target audience. As a result, many millions of dollars have been invested, and wasted, creating solutions that aren’t fit for purpose. If more consideration was taken – the space would look very different.
When looking specifically at custody for digital assets, the industry has remained quite small. A crypto-custodian with a few billion in custody may seem large, but take a look at the traditional world, to the likes of BNY Mellon or StateStreet, and you’ll see that tens of trillions are under custody. That’s 35,000 times the size of your average crypto custodian. Even though the industry has recovered from the crypto winter of 2018, custody solutions in the digital assets space are still competing for a large slice of a small pie.
Despite this, Copper has had a great year.
We have gained traction and have been signing up institutional investors to our custody and settlement infrastructure, with hundreds of millions being traded and stored through our platform every month.
On the pure technology side of the industry, the biggest advancements we’ve seen have been in private key management technology. There are more people coming in to commoditise the space – especially with multi-party computation (MPC) technology, which can remove the need for a private key altogether. At the start of the year there were 2 main players, now there are around 20 – this is a space that will continue to become crowded in 2020; and there will likely be some consolidation along the way as a result.
Through a variety of clearing and settlement solutions – counterparty risk will be dramatically reduced next year. These solutions will be essential in getting more institutions on board. By extension, Prime Brokerage will become ever more prominent, particularly as more lending facilities are established to facilitate greater volume.
2020 will be interesting as there is still much proving left to be done in the market. For example, companies that raised funds in 2017/18 (partly through the ICO boom) and haven’t started to generate revenue will struggle and perhaps disappear unless they pursue additional fundraising, which will be hard to come by. The biggest factors influencing this are the hangover left from the 2017 ICO ‘FOMO’ madness, and also now the increased scrutiny tech companies face in the wake of the Softbank/WeWork debacle.
Regulators in 2020 will either be a lantern in the darkness, or the darkness itself. Disappointingly, we expected to see a lot more movement towards unified frameworks in 2019.
The SEC’s case against Telegram for allegedly selling an unregistered security (Gram) is a testament to that. Telegram’s hearing scheduled for early 2020 will set the tone for the rest of the year.
This follows an antagonistic 2019, with a hostile House of Representatives, an SEC dismissive of ETFs, fragmented views at State level, and globally some very strong reactions to the 800 pound Gorilla in the room.
Facebook via the Libra Association, given the firm’s recent run-ins with regulators around the world concerning privacy and political content, was perhaps not the cheerleader our industry needed (or wanted). Though it certainly exemplifies the adage – ‘there’s no such thing as bad press.’
To further conflate issues, US/China trade relations, which have been deteriorating for years, continue to spiral into unhealthy territory. President Xi Jinping scored an easy win by declaring China a blockchain friendly country the same week Marc Zuckerberg faced a grilling in Congress.
The mere hint that China could be developing a state-backed digital currency, while the US struggles to grasp the difference between stable coins, cryptocurrency, and private blockchain tokens, suggests China could become a very attractive and competitive country.
If 2017 was the wild west, 2018 crypto winter, and 2019 as yet undeclared, then 2020 will surely be the year of infrastructure and acceptance. Admittedly not the sexiest moniker, but who cares when we’re getting real work done. Copper are looking forward to another successful year ahead.