Analysis by Morgan Stanley Capital International (MSCI) reveals that at least 52 companies representing over $7 trillion in market capitalization have some form of crypto exposure. The analysis noted that crypto is steadily “creeping” into the portfolio of institutional investors, whether they are an advocate or a non-enthusiast.
Institutional Exposure to Crypto on The Rise
A wide array of companies are now exposed to the cryptocurrency market. Ranging from crypto exchanges, mining firms, companies that hold Bitcoin on their balance sheet, and businesses exposed to crypto-related services
As per MSCI, the total value of companies exposed to crypto surpasses the $7 trillion mark. Coinbase, the largest crypto exchange in the US, and Bitcoin balance-sheet holders, like Tesla and MicroStrategy, are among the better-known crypto exposed companies.
The report also mentions that as companies dip their toe in crypto-market services, they lay down conditions for more firms to get indirect exposure to crypto. MSCI reported:
“Institutional investors may be experiencing a “creeping” exposure to cryptocurrency, as new companies built around the asset class are added to indexes and older, established companies invest in cryptocurrency.”
The ever-increasing influence of crypto-assets brings with it a variety of challenges for companies and investors. MSCI outlines at least three of these challenges, which are environmental, social, and governance risks.
Environmental risks are largely limited to greenhouse-gas emissions and electronic waste (e-waste), while social challenges include investor protection and education, according to MSCI. However, the report claims that governance challenges are complicated and should be addressed with great caution.
Harlan Tufford, who leads MSCI’s North American corporate-governance research, mentioned some governance challenges, saying:
“Really simple questions start to become really tricky here. Like, who in the company knows the passkey to access your private anonymous wallet that stores, you know, a billion dollars in Bitcoin? And how do you monitor that?
The Gap Between Crypto and Finance is Shrinking
One of the major reasons behind the increasing institutional interest in crypt firms is the fact that the lines between traditional finance and Decentralized Finance (DeFi) are starting to blur. For instance, the Hong Kong-based crypto exchange Bitfinex has recently launched Bitfinex Securities, a platform for trading tokenized equities and bonds.
Prior to this, crypto exchanges like Binance have been using stock tokens to offer their customers exposure to securities and shares of prominent companies. Further, there are over a dozen synthetic protocols offering tokenized clones of traditional financial assets via Ethereum.
As more and more crypto-centered firms are going public, institutional investors are finding opportunities to indirectly invest in cryptocurrencies. Coinbase was the first major crypto firm to go public earlier this year.
Following in Coinbase’s footsteps, Circle, the company behind the regulated USD Coin (USDC) stablecoin, announced its plans to go public on The New York Stock Exchange (NYSE). Binance.US, the US arm of the cryptocurrency exchange Binance, also aims to address the regulatory concerns and go public by 2024.
Nevertheless, it is worth noting that amid a shrinking gap between crypto and finance, the interest in Web3 is picking up steam.
Web3: The Decentralized, User-Owned Network
For the most part, Web3 is a blanket term for all the decentralized apps running on the Ethereum blockchain. Such apps are open-source, decentralized, and hyper-efficient: meaning everyone is allowed to participate. There is no centralized power in control and, so goes the theory, since there are no middlemen, costs are minimal.
Web3 is mainly considered as the future of the internet and the next generation of Web2. Web2 is the current iteration of the internet where there are easy-to-use websites featuring user-generated content. The major downside to Web2 is centralized controlling powers like Google and Facebook that invariably have access to a large number of their users’ personal data.
However, unlike Web2, ownership and control are decentralized in Web3. This means that there will be governance, but instead of a single entity, an entire community will be in power. There are also other benefits, e.g., users will gain access to everything across Web3 with one single wallet whereas Web2 requires different logins and passwords for every website.
All in all, Web3 empowers a transition to a more democratic internet where there are no risks of censorship and suppression.
Arguably, the transition to Web3 has already begun, the adoption NFTs by major crypto exchanges is an indication. With Coinbase launching its NFT marketplace earlier this week, now three of the top five crypto exchanges support NFTs.
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About the author
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.