Source: KPMG; Compiled by: Tao Zhu, Golden Finance
Canadian institutional investors and financial services organizations returned to the crypto-asset space in 2023 as the industry recovered from a turbulent period, the market rebounded, regulatory clarity improved, and digital asset innovation increased.
According to the biennial survey conducted by KPMG in Canada and the Canadian Alternative Assets and Strategies Association (CAASA), Financial services institutions that provided crypto-asset products and services to clients increased by 22% last year compared to 2021, and institutional investors that included crypto-assets in their portfolios increased by 26% last year compared to 2021.The survey collected feedback from financial services organizations and institutional investors operating in Canada.
Half of respondents in the financial services industry said their organizations are actively offering at least one type of crypto-asset product or service to clients, up from 41% in 2021. Among institutional investors, nearly four in ten (39%) report investing directly or indirectly in crypto assets, up from 31% in 2021.
“When we last conducted this survey in 2021, it was a strong year for crypto assets. The following year was a turbulent year with fraud and collapses of major crypto asset trading firms, but these events had a cleansing effect on the industry,” said Kunal Bhasin, partner and co-head of KPMG’s digital assets business in Canada.
“Rising U.S. debt combined with rising inflation could provide a catalyst for cryptocurrencies to rise in 2023, with investors seemingly seeking alternative asset classes as a depreciation hedge and reliable store of value. Our survey results suggest that crypto assets are gaining traction as an investable alternative asset class among such institutional investors and financial services organizations in Canada,” added Mr. Bhasin.
Kareem Sadek, Head of Emerging Technology Risk and Co-Head of KPMG's Digital Assets Business, added: “Canada has played a leading role in creating a regulatory environment that supports innovation in crypto assets, from approving the first Bitcoin and Ethereum exchange-traded funds to allowing complex strategies involving derivatives and Ethereum staking, and the rise in crypto asset prices may be the reason why institutional investors are increasingly attracted to the crypto space.”
Survey Highlights
Financial Services:
50% offer at least one type of crypto asset service (up from 41% in 2021);
52% offer crypto asset trading (*no comparable data for 2021);
48% provide custody, clearing or settlement services (up from 2021);
33%); 38% offer quantitative trading (vs. 11% in 2021); 14% offer wealth management or financial advice (vs. 42% in 2021); 24% have issued ETFs or regulated products (vs. 25% last year)
Institutional investors:
39% of respondents said they had direct or indirect exposure to crypto assets in 2023 (up from 31% in 2021); 75% own crypto assets directly (vs. 29% in 2021); 50% invest through exchange-traded funds, closed-end trusts or other regulated products (unchanged); 58% of respondents have had exposure to crypto-related stocks (vs. 36% in 2021); 25% have invested in venture capital or hedge funds as a limited partner (vs. 29% in 2021); and 42% of respondents reported exposure through derivatives (vs. 14% in 2021).
Financial Services
Financial services organizations offer a range of crypto-asset investment services to clients, with each respondent averaging two to three services, compared to an average of one to two services in 2021. Client demand for crypto-asset services was an important driver, with eight respondents citing it as a key driver. Ten financial services respondents cited it as a primary factor in expanding crypto-asset services, up from half in 2021.
The three most common types of services provided by financial services organizations include: Crypto-asset trading; Custody, clearing and settlement services; Quantitative trading. Less common services provided include financial advisory and wealth management services, equity and debt capital markets transactions for crypto-asset companies, and commercial banking services for crypto-asset organizations.
“Traditional financial institutions are increasingly recognizing the need to offer crypto-asset services to meet client needs. Even so, Canada’s large financial institutions need to become more adaptable to the unique challenges that crypto-assets present related to anti-money laundering and financial crime. They are providing more commercial banking services to cryptocurrency companies,” Mr. Sadek said.
Growth in Crypto-Asset Investment in 2023
Institutional investors are increasing their investments in crypto-assets and adopting a wider range of investment strategies compared to two years ago. A third said they had allocated 10% or more of their portfolio to crypto assets, compared with one in five two years ago.
Investors are using a variety of strategies to gain exposure to crypto assets, including direct ownership and investing in regulated products such as ETFs, stocks and derivatives.
More than two-thirds (67%) of investors cited mature markets and custody infrastructure as key reasons for their first crypto investment - up from 14% in 2021. More than half (58%) of investors also cited strong market performance - up from 21% in 2021. Bitcoin's price has risen 150% in 2023 and is up 50% so far in 2024.
“A pivotal moment for crypto assets came in January 2024 when the U.S. Securities and Exchange Commission (SEC) approved a spot Bitcoin ETF. This was a milestone for many market participants. This attracted many traditional asset managers with a strong reputation in the crypto asset industry,” said Mr. Sadek, adding that the Ethereum ETF is also expected to be approved in 2024.
Mr. Bhasin said he expects more financial institutions and investors to increase their investments in crypto assets in 2024. Before investing, he advises them to:
Seek education about the cryptoasset industry (through seminars, conferences, etc.);
Develop a strategic vision and roadmap for cryptoasset investing or providing cryptoasset services;
Develop proofs of concepts and solutions to achieve production-grade products;
Research, source and evaluate a range of service providers to help implement cryptoasset strategy and ensure they meet operational and regulatory requirements;
Establish internal policies and controls (e.g., anti-fraud controls) to meet management, industry and regulatory requirements.
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