With rising cryptoasset adoption in Canada, there’s reason for optimism

The past two years have been turbulent for the cryptoassets industry. At the same time, rising cryptoasset adoption rates, strong performance and positive regulatory tailwinds suggest there’s reason to be optimistic.

This outlook and other industry trends are found in a recent survey conducted by KPMG’s Digital Assets Centre of Excellence (CoE) and the Canadian Association of Alternative Strategies & Assets (CAASA), which gathered responses from institutional investors and financial services organizations on their perspectives and practices related to cryptoassets.

KPMG and CAASA last performed the survey in 2021, which was a very strong year for crypto. The intervening year saw significant setbacks, including the collapse of a cryptoasset exchange , a lender and a brokerage. More recently, the Department of Justice investigated a large global exchange, which resulted in criminal charges and a multi billion dollar settlement for Anti-Money Laundering (AML) and other violations.¹

These events have had a cleansing effect on the industry. With stronger regulation globally and bad actors removed, the industry is gaining renewed momentum. These and other trends support the ongoing investment potential of cryptoassets and suggest a path forward for cryptoasset adoption by Canadian investment organizations. Here’s where cryptoasset adoption stands in 2023 and where it’s headed in 2024.

With 2021 results as a comparative benchmark, the survey demonstrated that cryptoasset adoptions increased in 2023. More institutional investors have some form of crypto exposure and are allocating a larger proportional share of their portfolio to crypto than reported in 2021.

Diving into the survey demographics, we see more crypto allocations on the part of high-net worth individuals, family offices, venture capital, hedge funds, and private equity organizations. These investors tend to be less risk-averse and open to alternative types of investments. Additionally, smaller firms made up a larger portion of our 2023 respondent pool, suggesting that even though they tend to be less risk-averse, they appear to be more willing to explore cryptoasset investments in 2023 than they were in 2021.

Bitcoin consumes considerable energy mining and staking transactions to the blockchain with the Proof-of-Work (PoW) consensus mechanism. A relatively newer mechanism, Proof-of-Stake (PoS), recently adopted by the Ethereum network, reduces the computational power needed to process and validate transactions, significantly reducing its draw on electrical energy virtually to zero (at least a 99.94 per cent reduction).² The change makes Ethereum much more attractive to investors with environmental sustainability mandates. It’s worth noting that investors that owned crypto were more aware of this environmental improvement, according to the survey results.

Many institutional investors that weren’t yet active in the cryptoasset space lacked knowledge about consensus mechanisms and the suitability of PoS for ESG investing. To make the right investments for their portfolios, investors need to know how cryptoassets are evolving. It’s essential to get up to speed or engage advisory partners with industry knowledge to help navigate the journey.

In 2021, the average number of strategy investors employed to allocate crypto was approximately 1-2. That average rose to 2-3 in 2023, which suggests that institutional investors are exploring further ways to enhance their investment exposure. Strong investment performance helped drive adoption and was a key enabling factor in 2023. Public equities and regulated investment products remain popular alternatives to direct exposure.

The largest percentage increase of ownership was seen in cryptoasset derivatives (14% to 42%). This is likely related to the Chicago Mercantile Exchange (CME) having grown to become the largest derivatives trading platform by volume, eclipsing global offshore exchanges. CME open interest increased by over 200% between December 2022 and December 2023 ($1.31B to $4.79B),³ replacing off-shore giant Binance as the largest trading venue by open interest (as of November 9th, 2023).⁴ This is a monumental shift since the collapse of FTX in November 2022. It demonstrates that a considerable proportion of adoption has shifted from off-shore trading platforms to onshore platforms like the CME.

While Canada was the first in the world to allow spot-based exchange-traded funds (ETFs) for crypto, they’ve remained contentious in the United States (US). In January 2024, after years of anticipation, the US Security and Exchange Commission (SEC) approved applications for spot Bitcoin ETFs for the very first time.

This move by large traditional asset managers and the SEC supports an important step toward legitimizing Bitcoin and crypto as an investible alternative asset class. With CME now the largest exchange venue by size, and Coinbase making comparable strides in the underlying spot market, the US onshore market has grown sufficiently large to support a spot-based ETF. These events are widely expected to signal to other investors and financial services providers that it’s permissible and potentially worthwhile to enter this space.

The survey also registered a notable increase in direct cryptoasset ownership. In previous years, many institutional investors gained cryptoasset exposure indirectly through brokerage accounts or startup exchange platforms. While custodial infrastructure was less developed, this helped investors avoid the complexities of custody and the management of private keys.

Since that time, the crypto market and the custody infrastructure supporting it have markedly matured. In particular, three verticals – infrastructure, crypto financial services and trading/brokerage – have received significant amounts of Venture Capital funding since early 2021 to develop institutional grade products and services to support adoption. Major enterprise-grade exchange platforms have emerged. In parallel, mature crypto intelligence and Anti-Money Laundering (AML) tools are increasingly allowing institutional investors and financial institutions to engage and transact with cryptoassets in a meaningful way.⁵

Custodians are now held to a far higher standard by the industry and regulators, such as documenting their policies and procedures through SOC2 reports. New regulatory frameworks, paired with these infrastructure improvements, are helping manage risk and drive adoption.

Among financial services organizations, the survey reveals that the majority are waiting for client demand to start building capability and competitive retail offerings for crypto. Given the growing interest in cryptoassets and strategies for allocating crypto, customers who want to invest will have no choice but to engage organizations with the means to support those purchases and transactions.

It’s therefore an important time for financial services providers to revisit their strategic vision around cryptoassets, from both a product and payment infrastructure standpoint. With continued adoption expected, it’s important to be proactive and anticipate demand instead of scrambling to meet need when the time comes.

While lawsuits and settlements may have dominated the crypto news cycle in 2022-2023, investment performance remains strong. Increased scrutiny by lawmakers has ushered in much-needed market surveillance, regulatory action, and policies. Those regulatory actions have made the crypto space far more investable from an institutional point of view.

Looking ahead to 2024, we expect to see a continuation of institutional adoption of cryptoassets. Driven by client demand, this will likely push financial services providers to improve their existing cryptoasset offerings and encourage other sidelined organizations to become more active. As competition intensifies and the quality of offerings from reputable and familiar financial services providers improves, it is likely that the remaining close-minded investors may become more open to investing in cryptoassets. We anticipate this growing adoption will reach an inflection point, where many organizations will develop and implement a comprehensive cryptoasset strategy within their overall business strategy.

We also anticipate an increase in adoption of Real World Assets (RWAs) on-chain. Yield-bearing RWAs saw substantial growth in 2023 and are positioned for continued growth in 2024. In the current high interest rate environment, holding stablecoins presents a considerable investment opportunity for yield. As a result, many cryptoasset organizations have innovative solutions that tokenize assets like treasuries or stablecoin issuance with embedded yield accruing passively to holders. These innovations have led to the market share of yield-bearing RWAs growing in 2023 from 31% to 53% from January 1 to September 30.⁶

As CeFi platforms increasingly integrate RWAs and DeFi applications leverage on-chain composability, we anticipate significant growth in RWA adoption. This trend is expected to drive increased interest from institutional investors and financial services organizations in 2024. Institutional investors are drawn to RWAs for their high yields and innovative investment opportunities, while financial services organizations are poised to expand their offerings in response to heightened demand and capital flow in this sector.

Given recent trends, crypto is poised to have a considerable impact on the investment industry and the financial services landscape in the months ahead. Is your organization prepared to navigate the evolving cryptoasset industry?

Our team of experienced professionals are ready to assist you on any aspect of your cryptoasset investment, from strategy and implementation to risk mitigation. We have substantial experience working with financial services organizations, ranging from banks to asset managers, and institutional investors like family offices, hedge funds and pension funds.

Our core service offerings span across the adoption spectrum, starting with education and research, due diligence and vendor assessments, to supporting organizations with launches of full-scale cryptoasset products and services. Our Digital Assets Center of Excellence works closely with our global counterparts and other professionals in Canada, including KPMG Law and KPMG in Canada’s Deal Advisory, Forensics and Audit practices to help you wherever you are in your cryptoasset journey. Connect with us to start the conversation.