Institutions are broadening their interest in digital assets during the bear market

The digital assets landscape is evolving rapidly.

Amid the current bear market, financial institutions are exploring new programmable and tokenised applications based on the building blocks first introduced within the DeFi ecosystem, adapting them to the specific needs of more established finance settings.

That’s not to say they’ve lost interest in crypto. Institutional inflows into Bitcoin ETFs have stabilised in recent weeks, with many investors now viewing the original cryptocurrency as a 24/7, cross-border geopolitical hedge rather than just a risk asset.

But we’re certainly seeing financial institutions thinking more widely about tokenisation and blockchain’s role in financial market infrastructure.

I’ve written previously for Finextra on how smart companies will build during the bear market, but what are they building? And what are the use cases that are becoming more viable for long-term institutional adoption and mainstream financial utility?

Navigating new applications

Much of the focus, of course, has fallen on stablecoins. When the US passed the GENIUS Act, it became the first federal regulatory system for stablecoins, laying the foundations for innovation in the banking and retail sectors.

In the UK, the Financial Conduct Authority (FCA) recently held a Sprint, inviting industry participants – including Zumo – to help shape the future of stablecoin payments in the UK. While there are issues to iron out around holding limits and backing assets ratios, it’s clear stablecoins have a big role to play in prompting faster, cheaper cross-border payments and remittances.

The FCA has invited four firms, including Revolut, to trial stablecoin products in its sandbox environment. This will help the regulator to assess its proposed policy in a live environment and ensure future rules are clear and effective.

But this is only scratching the surface. As we first highlighted in a report launched at Sibos 2023 in Toronto, a deeper dive into blockchain technology unlocks a wealth of new opportunities for institutions – and many are now coming to fruition.

This includes the growing popularity of tokenised deposits, which are digital representations of traditional bank deposits recorded on-chain, enabling near-instant and programmable transactions. Issued by regulated banks, they act as a direct claim on the bank, offering lower risk than stablecoins while improving liquidity for institutional payments.

Real-World Asset (RWA) tokenisation is also quickly gaining traction. RWAs are assets that exist off-chain – such as property, gold, and even fine art – but are being brought on-chain to leverage the benefits of decentralised technology, such as 24/7 trading, transparency, and increased liquidity.

Tokenised securities, meanwhile, are digital representations of traditional financial assets – such as stocks, bonds, or investment funds – that are issued and traded on a blockchain. When a security is tokenised, its ownership records are maintained on a distributed ledger rather than traditional, centralised systems. Examples coming to market include Franklin Templeton’s BENJI fund and BlackRock’s BUIDL fund, with firms using tokenised securities to fractionalise high-value assets and provide faster, more efficient settlement.

Cutting through the jargon, RWAs and tokenised securities are often terms that are used interchangeably when discussing tokenised investment products. The difference lies in structure – for example, if a token-referenced item is a physical asset like a piece of artwork, it’s a RWA. If that piece of artwork is then put into an SPV, and shares are sold to investors via a token on a regulated exchange, then it becomes a tokenised security.

But ultimately, both use blockchain technology to improve efficiency over legacy financial systems.

Bringing it all together

What’s really piquing the interest of institutions is the potential when you bring these applications together.

For example, stablecoins now often act as the cash leg for trading tokenised securities. By using the likes of USDC or USDT to purchase tokenised financial instruments, transactions benefit from ‘atomic swaps’, where the exchange of assets and cash occurs simultaneously, effectively eliminating counterparty risk and reducing settlement times.

Smart contracts facilitate this interaction, ensuring that the transfer of the tokenised security only occurs if the corresponding stablecoin payment is finalised, and vice versa.

These new dynamics, which unlock cost and efficiency savings, are reshaping how institutions view digital asset investments.

According to a recent study by State Street, institutions have significantly lowered their expectations for when they anticipate on-chain digital asset investments to become a widespread practice that is interoperable with traditional operations. More than two-thirds (68%) of respondents anticipate this will happen in under 10 years, more than double the 29% recorded in State Street’s previous study.

What’s needed now is progressive facilitators that can help the institutions to come together, collaborate, and realise new opportunities. Facilitators like the Canton Network, which is an interoperable, privacy-enabled blockchain specifically designed for institutional finance.

It connects previously siloed operations, helping banks, asset managers, and custodians to work together to tokenise assets, enabling cross-application workflows and atomic settlement while maintaining regulatory-grade privacy and control.

This will help the likes of Blackrock and other forward-thinking institutions to explore the partnerships that will help them to push the boundaries of what’s possible in the digital assets arena.