Herwig Temmerman et Dimitri Cordenier (BearingPoint): Crypto Assets and their impact on the financial Industry

Crypto assets are becoming more and more mainstream, with an increasing number of investors turning to digital assets as an alternative investment class. This presents both opportunities and challenges for financial institutions, such as banks, central depositories, and custody service and asset service providers. Dimitri Cordenier, Manager, and Herwig Temmerman, Partner at BearingPoint discuss these impacts and challenges in more detail.

How is the expanding crypto asset industry impacting the traditional financial services industry?

The growing demand from investors and banking clients for crypto assets has led more and more traditional financial institutions to adapt their existing product and service offerings. An increasing number of banks are either closely considering the topic of virtual assets or have already started to offer services such as trading and crypto custody services. They are also developing new products and services that are specifically designed around digital assets, such as crypto asset funds, exchange-traded products (ETPs), tracker certificates but many have also started to offer direct exposure to virtual assets by using dedicated crypto custody technology. DLT technology is also bound to disrupt other parts of the industry such as the infrastructure used by central depositories, custody service and asset service providers and international payments, to name a few examples.

Do you think the enactment of appropriate regulation can and will foster the adoption of crypto asset services & DLT technology by traditional financial institutions?

Many countries are adapting their regulation. Switzerland, for instance, enacted a Distributed Ledger Technology Legislation (DLT) a couple of years ago. This has led to a blooming crypto ecosystem, with the birth of numerous leading domestic crypto companies such as regulated crypto exchanges, regulated pure crypto banks and cutting-edge crypto technology providers.

Similarly in Luxembourg a Bill of Law was approved in 2019 allowing securities to be held through DLT-based technologies. Since then, Luxembourg has been taking slowly but surely further steps to becoming a significant player in the rapidly evolving crypto industry. The European Markets in Crypto Assets (MiCA) regulation, set to be voted in April 2023, is expected to provide regulatory clarity and guidance to the crypto financial services industry. This development will benefit not only Luxembourg but also the wider European financial industry. With a strong reputation for innovation and a favorable regulatory environment, Luxembourg is well-positioned to attract new businesses and investments in this space. By leveraging its reputation and strengths in finance and innovation, Luxembourg is poised to become a key player in the rapidly evolving crypto industry.

“By leveraging its reputation and strengths in finance and innovation, Luxembourg is poised to become a key player in the rapidly evolving crypto industry.”

A lot of noise has been made around DLT technology disrupting the traditional security & custody services industry? The current adoption pace seems to be slower than expected. In your opinion what is the reason for that?

Many concurrent DLT initiatives and proofs-of-concept have been launched. However, no unified and market-wide initiative with enough traction has been successful in mobilizing all the players around the table to date. As a result, we have not seen the emergence of a DLT-based solution or technology capable of fundamentally replacing the existing infrastructure used in central depositories, security service and custody service sectors. Moreover, other challenges such as neutrality, consumer confidence, scalability of the technology and interoperability between the traditional financial infrastructure and the future DLT-based infrastructure still need to be addressed to reach systemic adoption. Nevertheless, this technology is still very young, and the market is evolving rapidly. We believe that significant progress will be made in the next 5 years, which could lead to a much wider adoption of DLT technology in these sectors.

Many thanks to Elena Chretien and Robin Domas-Lieux from BearingPoint for their research.