News that Goldman Sachs, JPMorgan and Citi are considering entering the crypto custody market likely surprised many who haven’t followed the blockchain tech or digital asset moves of major U.S. financial institutions over the last half-decade. However, analysis based on publicly available blockchain initiatives data clearly shows that many institutions – some more than others – are slowly de-prioritizing blockchain tech and shifting their focus to native crypto assets.
To assess how institutions are adapting to blockchain technology, we surveyed their initiative announcements. We looked at credible media, such as CoinDesk and the Financial Times, and defined an initiative as a reported “investment, internal or external-facing company project, or consortium participation event primarily involving the company.”
We can see a clear shift. In 2015 and 2016, financial institutions tended to have a technology-first focused strategy. They were founding members of consortia like R3 and the development of the Corda protocol. More recently, as you can see in our matrix, leaders in the space have shifted away from this earlier positioning to focus their efforts more towards digital assets (at least in terms of the number of total initiatives).
The shifting focus is marked. Up until 2018, blockchain and distributed ledger technology (DLT) dominated the hype pushed by major consortia formations, which also came at the time where blockchain-without-crypto startups raised financing in the tens of millions of dollars from major financial institutions. The landscape has since changed significantly.
Goldman Sachs exemplifies the change. Whether through investments, exploring the launch of its own digital token or the previously mentioned entry into custody, the bank has shifted from technology to a balanced and diverse approach across technology and assets, which, per our graph, place them in the lead, ahead of the rest of the market.
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JPMorgan, which for years had led a strong technology-first approach with its development of Quorum and its long-held bearish public voice on digital assets, has begun to reverse course. From 2018 to 2020 on the graph above, we can see JPM trending upwards to become more asset-focused. In part, this has been driven by JPM divesting itself of Quorum to ConsenSys and a change of tone in its position on bitcoin.
In 2020, Fidelity saw a great acceleration of its asset-focused strategy launching an “incredibly successful” bitcoin custody business and continuing to invest in various crypto-related startups. Its competitors, such as Schwab, are also entering the market and taking positions in crypto mining stocks. Meanwhile, the largest asset manager of them all, BlackRock, recently signaled that it will soon be “getting into the bitcoin game.”
Looking at the middle of the lower-left quadrant, we see that in 2016 Citi took an early lead, participating in more initiatives than any other major U.S. financial institution. This continued into 2018 as Citi added more initiatives and moved horizontally to the right on the graph while remaining focused on technology.
However, perhaps due to limited success in those initiatives, the bank has slowed its earlier blockchain and crypto exploration. Since 2018, apart from a digital asset initiative related to central bank digital currencies (CBDC), it has been associated with few new development in the institutional space.
Other financial institutions such as Morgan Stanley, Bank of America and Wells Fargo are clear followers, lagging in the shift from technology-centric to assets-centric. Morgan Stanley’s recent announcement that it has boosted its stake in MicroStrategy may be an early indication these firms are starting to catch on to the ways of their competition.
Towards the lower-right quadrant of this graph, this shift has hit the industry like a tsunami. As we have written before, this is far from an isolated phenomenon.
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Enterprise efforts focused on the underlying technology of blockchain have, by and large, fallen short of expectations. Having said that, there are still firms at various levels of progress that remain staunchly focused on the technology side of the industry. R3, which was previously in a precarious situation, saw a major boost in its financial standing from the Ripple settlement. Digital Assets raised $150 million, but prominent executives departed and general doubts have been raised about its initiatives. Axoni has been the one getting the most initial traction.
Recent developments among major financial institution-driven consortia are further evidence that technology-first plays are fading. Over the last 12 months, few have announced additional members. Türk Reasürans joined B3i, but the leading insurance blockchain network still counts just 21 shareholders with only five of the top 25 insurers and just seven of the top 50 reinsurers.
Even Fnality, the leading network of distributed financial market infrastructures, hasn’t announced a new member since September 2019. The largest global blockchain network convener, IBM, has found limited success in the financial services space and, at times, its initiatives have been found to not even require blockchain at all.
What have banking executives said publicly in recent months relating to blockchain consortia or DLT? Hardly anything. On the assets side, however, we have very promising signals such as Goldman’s new head of Digital Assets who envisions “a future in which all of the world’s financial assets reside on electronic ledgers.”
Financial institutions may demonstrate to the enterprise world that perhaps blockchain’s greatest value is not in the underlying technology but its native digital assets. Initiatives that find the right mix are challenging to implement, but we believe this exploration may be justified by its high potential reward.
As we have written in the past, enterprise blockchain plays have failed mostly due to challenges related to economic incentives. Given that, it may be time for financial institutions to leave the technology-first approach aside. Instead, future initiatives should focus on identifying the economic value at play, whether that's in digitizing existing financial assets or existing digital assets such as stablecoins. Those who think asset-first will chart the course towards the fast-approaching native digital economy.
Prysm Group Associate Johnny Antos contributed to this article.