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 with a rebound in markets, greater regulatory clarity, and increased innovation in digital assets.
According to a biennial survey conducted by KPMG in Canada and the Canadian Alternative Assets and Strategies Association (CAASA), 22% more financial services institutions offered crypto asset products and services to clients last year than in 2021, and 26% more institutional investors included crypto assets in their portfolios last year than in 2021. The survey collects feedback from financial services organizations and institutional investors operating in Canada.
Half of respondents in the financial services industry say 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.
"The last time we conducted this survey was in 2021, which 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 coupled with rising inflation could provide a catalyst for crypto gains in 2023, with investors seemingly seeking out 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 Practice, 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 is likely 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 comparative data for 2021);
48% provide custody, clearing or settlement services (vs. 33% in 2021);
38% offer quantitative trading (vs. 11% in 2021);
14% provide wealth management or financial advice (vs. 42% in 2021);
24% launched an ETF or regulated product (vs. 25% a year ago)
corporate investor:
39% of respondents reported direct or indirect exposure to crypto assets in 2023 (up from 31% in 2021);
75% directly own crypto assets (vs. 29% in 2021);
50% invested through exchange-traded funds, closed-end trusts or other regulated products (unchanged);
58% have exposure to cryptocurrency-related stocks (vs. 36% in 2021);
25% invest as limited partners in venture capital or hedge funds (vs. 29% in 2021);
42% of respondents reported exposure via derivatives (vs. 14% in 2021).
Financial Services
Financial services organizations offer a range of cryptoasset investment services to clients, with each respondent offering an average of two to three services, compared to an average of one to two services in 2021. Client demand for cryptoasset services was an important driver, with eight respondents citing it as a key driver for expanding cryptoasset services. Ten financial services respondents cited it as a primary factor for expanding cryptoasset 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 merchant banking services for crypto-asset organizations.
“Traditional financial institutions are increasingly recognizing the need to offer crypto-asset services to meet customer needs. Even so, Canada’s large financial institutions will need to become more adaptable to the unique challenges crypto-assets present related to anti-money laundering and financial crime. They will need to provide more commercial banking services to cryptocurrency companies,” said Mr. Sadek.
Crypto asset investment growth in 2023
Institutional investors are increasing their exposure to crypto assets and adopting a wider range of investment strategies compared to two years ago. A third said they have allocated 10% or more of their portfolio to crypto assets, compared to a fifth two years ago.
Investors are using a variety of strategies to gain exposure to crypto assets, including direct ownership as well as investing in regulated products such as ETFs, stocks and derivatives.
More than two-thirds (67%) of investors cited mature markets and custody infrastructure as a key reason 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 rose 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 event for many market participants. This attracted many traditional asset managers with a strong reputation in the crypto asset industry,” Mr. Sadek said, adding that an Ethereum ETF is also expected to be approved in 2024.
Mr. Bhasin said he expects more financial institutions and investors to increase their exposure to 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 crypto-asset investing or providing crypto-asset services;
Develop proofs of concepts and solutions to achieve production-grade products;
Research, source and evaluate a range of service providers to help implement crypto-asset strategies 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.