Institutional investors view digital assets are an inevitable institutional opportunity, and a promising asset class that is set to grow substantially, says a research brief.

There are four crucial focus areas for institutions considering entry into the digital asset market -- asset allocation, custody, regulation and risk management, says the OKX-commissioned research brief authored by Economist Impact, entitled "Digital assets as the new alternative for institutional investors: market dynamics, opportunities and challenges".

Liquidity, market integration and compliance are also highlighted as important factors for market entry says OKX, a leading crypto exchange and Web3 technology company.

Roundtable discussion

The focus areas and insights that emerged in the research brief were gathered from an Economist Impact roundtable discussion in Dubai in the second quarter of 2024 featuring senior business leaders in digital assets and finance, as well as desk research and interviews of representatives of leading financial services and investment firms, including Citi, Al Mal Capital, Skybridge Capital, VanEck and others.

Additional insights

*There is "growing consensus" among institutional investors that digital assets, such as cryptocurrencies, NFTs and tokenised private funds, have an important place in portfolio asset allocations.

*Average allocations typically are currently between 1% to 5% based on risk appetites, and this is expected to increase to 7.2% by 2027

*Institutional investors plan to ramp up portfolio allocations to crypto through a number of investment strategies, with approximately 51% of investors considering spot crypto allocations, 33% considering staking of digital assets and 32% considering crypto derivatives

*69% of institutional investors anticipated increasing their allocations to digital assets and/or related products in the next two to three years

*The "rise of institutional-grade custodians" is ongoing and effective risk mitigation through custody is resulting in "new opportunities" for investors to access the digital asset markets.

*The institutional digital asset custody market is experiencing rapid growth, and is projected to have a compound annual growth rate of over 23% through 2028

*80% of traditional and crypto hedge funds that invest in digital assets use a third-party digital asset custodian

*There is a positive trend of convergence of local and regional regulatory frameworks, such as the MiCA cross-jurisdictional framework in Europe, and this is creating a pathway for adoption globally.

*Exchanges have recognised the need to flexibly respond to local regulatory requirements to balance the need to grow with the need to maintain market integrity

*Stablecoin regulation is one key area of focus and regulators have created stablecoin regulatory "sandbox" environments in tier-1 markets

*Risk management is a crucial step for digital assets to become allocated into institutional portfolios. Exchanges, custodians and custody insurers should prioritise robust infrastructure and security measures.

*The adoption of new technologies, such as proof-of-reserves, as well as independent third-party audits can increase digital asset adoption among institutions

*Comprehensive risk management strategies utilised in the traditional financial sector, including value-at-risk models, scenario analysis and stress testing, and reverse stress testing should be adapted and used to safeguard institutional investments in cryptocurrency and digital assets

Digital assets in investment portfolios

OKX Chief Commercial Officer Lennix Lai said: "This initiative to engage with the world's leading institutional investors demonstrates how digital assets are rapidly being adopted in investment portfolios. The trend will only intensify if we see advancements in blockchain technology, enhanced regulatory clarity and uptake of innovative digital solutions like tokenised real world assets. Our collaboration with Economist Impact demonstrates OKX's commitment to fostering a deeper understanding and adoption of digital assets among institutional investors worldwide."

John Ferguson, Economist Impact's head of globalisation, trade and finance practice, said: "As digital assets gain prominence in financial markets, regulatory standardisation as well as sophisticated custody and risk management solutions tailored to digital assets are crucial considerations for institutional investors.

“This research brief, sponsored by OKX and developed by Economist Impact, aims to equip institutional investors with insights into recent trends, ongoing challenges and emerging opportunities around digital assets as they navigate this fast-evolving ecosystem. The findings also highlight the powerful role that technology-driven solutions can play in embedding trust in digital assets among these investors."-

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