Beyond cryptocurrency: DeFi and blockchain

As investors weigh their approach to cryptocurrency, experts are saying there is much more to the digital asset field that comes with both opportunity and risk.

A recent study from private banking firm BNY Mellon Wealth Management found that, globally, 77 per cent of family offices are interested in or are involved in crypto, with more than 66 per cent intending to increase their crypto holdings within the next year or two.

Especially younger generations are interested in digitization generally, including tokenizing assets or blockchain, according to global multi-family office Stonehage Flemming in Britain-based Knight Frank’s recent Wealth Report.

The impact of decentralized finance as well as the underlying technologies that are being built around cryptocurrency – specifically blockchain – could hold promise and big payouts to those who get in on the ground floor, according to some.

Indeed, blockchain technology is being hailed by many as one of the leading innovations in the finance industry, as it has the potential to reduce fraud, enable quick peer-to-peer transactions, and present encrypted, decentralized finance.

But there are so many “ifs” still associated with cryptocurrency, blockchain and the intrinsic nature of digital assets in general, that many still think of it as a gamble, including Peter Mann, president and co-chief executive officer at Grayhawk Investment Strategies Inc. (Grayhawk Wealth).

“I don’t even know if you asked the people that were there at the beginning [of crypto] if they even envisioned that it would turn out the way that it has,” he says, “but the thought that there has been so much infrastructure built around it makes me think it will find some equilibrium, some intrinsic value. I just can’t define what that is right now.”

However, there are those in the digital asset space that think ignoring what is happening is not an option, especially for those who could be impacted by a decentralized financial world should that become more of a reality in the near future.

Alex Tapscott, managing director, Digital Asset Group, at Toronto-based alternative investment manager Ninepoint Partners, has been in the cryptocurrency and blockchain space for nearly a decade and he says he has stayed in it because he sees the revolutionary and disruptive technologies that are being produced as a result of this market and the positive changes that decentralized finance (DeFi) could bring.

“What DeFi and crypto promises is something really different, which is to reimagine the [financial] industry from first principles, meaning moving money, storing money, lending money, exchanging assets, insuring against risk, accounting, all these basic foundational building blocks of what the industry does,” explains Tapscott. “That, to me, is what makes it so exciting, because it’s not just a new layer on the industry. It is a new way of thinking about the industry.”

Tapscott warns that if financial institutions in Canada don’t acknowledge the need for their own disruption and evolution then they will go the way of the department store or Blockbuster.

“The thing about new technology is that people generally tend to overestimate their impact short term and underestimate the impact long term,” he explains. “I think we are near the inflection point where if incumbents do nothing, they’re jeopardizing their futures.”

“I think what a lot of banks need to appreciate is that whether they know it or not, they’re standing on a burning platform where the risk of staying put and doing absolutely nothing is actually greater than the risk of taking a leap,” adds Tapscott, “because eventually, this technology and other technologies is going to come for you, so you might as well be proactive and try to disrupt yourself.”

In fact, some American financial institutions, like investment bank NYC Mellon, have started moving in this direction and investing heavily in digital asset custody, meaning it safeguards digital assets in the same way it safeguards traditional money. “But so far, in Canada, there have been few if any proactive moves in this direction,” says Tapscott, which he says is a mistake.

“There is huge demand from institutional retail [and] high-net-worth individuals,” adds Tapscott, “to safely custody their digital goods, their crypto assets and other digital goods. Banks and trust vendors and counterparties I think have a unique role to play in that, and I think that’s an area where they could grow significantly.”

Henry Kim, a blockchain scholar at York University’s Schulich School of Business, acknowledges that those who invest in the right cryptocurrency could stand to make a lot of money, but it is a question of picking the right cryptocurrency and that comes down to its underlying technology.

“What you’re hoping for is that some of those networks that are behind some of those cryptocurrencies could be widely adopted,” says Kim. “Therefore, the cryptocurrency behind that could appreciate substantially. But that’s a huge gamble.”

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