SFF2022’s theme of Building Resilient Business Models amid Volatility and Change was incredibly pertinent to the digital assets ecosystem, which has experienced both the macroeconomic pressures felt in traditional markets, and a series of large-scale, idiosyncratic challenges that continue to rock the industry.
Whilst discussions and topics varied considerably over the course of the festival, this report provides a snapshot of industry sentiment across SFF2022 participants. It focuses on the opportunities, challenges, and the path ahead, with a particular focus on institutional adoption and recent developments bridging financial and Web3 ecosystems.
Oliver Wyman hosted the Digital Assets and Web3 Knowledge Plenary, roundtable sessions at the Elevandi Insights Forum, and was a sponsor of SFF2022.
Below is a summary of our report, for the full version, please click the PDF below.
Digital assets and Web3 were a core theme of SFF2022, and a pervasive topic throughout the festival. Industry leaders were energised by the promise of increased financial inclusion, cost and efficiency benefits that would flow through to consumers, the economic benefit of reduced friction for cross-border payments, and the possibility for new products and services enabled by the programmability, composability, and efficiency of digital assets.
Perhaps most exciting was the extent to which crypto-natives, institutions, and regulators were coming together and looking to collaborate to navigate the risks inherent in the ecosystem, establish the guardrails needed to stabilise the ecosystem without stifling innovation, and realise the potential benefits to ecosystem participants and the financial services industry.
The recent and ongoing market turmoil was well acknowledged, but many made the distinction amongst business, reduced investor enthusiasm and cryptocurrency valuations, and the infrastructure and opportunities arising in the wider digital asset ecosystem. The speakers touched on the poly-crises experienced over the past six months and the contagion that spread as valuations collapsed, along with the liquidity and solvency challenges striking major Web3 players.
The discussions turned to what it takes for participants to remain viable and thrive under these conditions. Furthermore, there was discussion on the potential benefit of cleaning out the unsustainable business models, discouraging excessively risky behaviours, and exposing vulnerabilities. Together, these actions could accelerate the maturing of the industry, by helping regulatory attention focus on where it is most needed and promote infrastructure development rather than speculative investing.
We see a bifurcation in crypto-natives. There are those reliant on speculative value or traded volumes, who are at a difficult spot in their funding cycle or haven’t hedged their balance sheets; these firms are struggling. But, there are those building infrastructure, launching projects with utility value, have raised capital, and are currently diversifying their revenue streams; they are benefitting. They are not focused on their next airdrop, or what their Discord followers are saying - they are building with a longer-term visionJames Gordon, Partner and Asia Pacific Digital Assets Lead, Oliver Wyman
With market volatility and regulation still in flux, the digital assets and Web3 ecosystem is at an inflection point, with many holding different views as to how the industry will evolve. From a gradual adoption of the underlying technology by retail, we are now seeing the explicit signs of a transformation of how the financial system works.
Regardless, ecosystem participants will have to navigate industry-specific and macro-economic challenges. Continued volatility of crypto assets, shifting value pools, and a tighter funding environment will make the clarity of value proposition, customer utility, and role in the ecosystem increasingly important.
Many firms have been focused on growth at all costs, willing to pay to acquire customers on the assumption it will attract funding and provide future monetization opportunities. However, with macroeconomic and geopolitical uncertainty the focus is shifting to sharper product-market fit and unit economics. FinTechs must focus and win in key markets, and ensure they are well funded and resilient to ongoing market pressures.
What are the actual key markets that you have to be in as a business in order to be successful? In a bull market, you don't actually know whether it's a great idea to be in a particular geography because every geography is scoring … so I think when people aren't thinking about where they're spending dollars today… you spend on… the must-win opportunities of the businessJonathan Levin, Co-Founder & Chief Strategy Officer, Chainalysis
Advancements in technology and the maturing regulatory environment pave the way for new products and services that utilize the underlying characteristics of DLTs in areas these institutions already participate. With the backdrop of exploits and bankruptcies, the role of established financial institutions as trusted service providers is likely to extend into the digital assets and Web3 ecosystem, with both intuitional and retail customers looking for safer ways to store and transact the digital assets. Established firms can leverage the resilience offered by their diversified revenue streams and strong balance sheets to build during the downturn, and with many crypto natives shedding staff to lower their cost base, there is talent in the market interested in stable income rather than start-up shares that wasn’t there before the downturn.
You have got to be consistent in your capacity to invest… and [be] sensible. When the top line is weak, you sort of dial back, when the top line is strong, you can spend some more moneyPiyush Gupta, CEO, DBS Bank
Central banks should continue to play a key role in enabling a more resilient financial system. In the context of digital assets, this has emerged in the form of extensive research, experimenting and collaboration with international peers on CBDC development, large investments in core infrastructure (for example, DLT-based settlement rails), and supporting industry participants with the large-scale adoption of CBDC use cases. Regardless of the target state paradigm for the future of money, central banks are ultimately trust anchors and guardians of a new frontier for financial inclusion, providing real-time and granular levels of supervision, and facilitating fast and cheap payments both domestically and abroad.
So, what is [the role of] central banks? Well, we are the providers, we sit at the heart of this, what we call a fiat money system, and as the technology moves it's a fantastic time to live in, because there are so many promising technologies coming our way. We need to carry on our role, building infrastructures that are open, so we don't end up in a lot of walled gardens, and incumbents or newcomers taking too large [a] share of the market, but actually an open infrastructure that provides competitiveness and inclusion, but also ensures stabilityCecilia Skingsley, Head of BIS Innovation Hub, Bank of International Settlements
There is much to do, but it is increasingly clear what needs to be done.
Policymakers and legislators must take a systemwide view on what is required, identifying gaps, working with ecosystem leaders, and introducing new policies in a self-consistent way across regulatory bodies and frameworks.
I think it will be incumbent upon policymakers and regulators to be engaged with a whole set of stakeholders, including industry, to be thinking responsibly about the existing frameworks we have, what needs to be tweaked and evolved, and how can we come up with frameworks that protect consumers, institutions, and markets, but also allow for responsible innovation in this space. And there are no easy answers and there are no quick fixesAdrienne A. Harris, Superintendent, New York Department of Financial Services
With increasing institutional adoption, regulatory clarity, and technological progress, the long-term role of digital assets and Web3 in the financial services industry will be both significant and potentially revolutionary in terms of its impact.