Management Summary
Digital Assets are here to stay – and they hold immense potential for the financial industry: This is the main result of KPMG's recent opinion poll on blockchain and crypto in digital assets. With 20 participating enterprises from six countries, the poll gives a comprehensive picture of the European financial industry's views on distributed ledger technology (DLT). Based on participant responses, we have formulated four core hypotheses:
Key Insight: The lack of a regulatory framework and legal certainty regarding cryptocurrencies like Bitcoin and Ethereum has been the main reason for the reluctancy of banks and asset managers to actively engage in the DLT market. This may be about to change with recent regulatory developments.
Key Data Points
Key Insights Summary
Regulatory Certainty Paves the Way for Innovation
Recent regulatory developments, particularly MiCA (Markets in Crypto Assets) and national initiatives like Germany's eWpG, are creating legal certainty that may encourage financial institutions to extend services toward digital assets.
DLT Leads to More Efficient Financial Markets
With fewer intermediaries and one common decentralized ledger, blockchain and DLT solutions can simplify financial markets and significantly improve operational efficiency.
Truly Digital Services and Products
Increasing demand for digital asset products and services is pushing established market players to expand offerings and target new investors and client groups.
No Future Without Digital Assets
European financial institutions must accelerate investments in digital asset products and services to remain globally competitive against BigTech and FinTech enterprises.
New Revenue Streams Through DLT
Financial institutions can exploit new revenue streams through security tokens and real digitization, making traditionally illiquid assets like art and real estate more accessible.
Cost Reduction Potential
DLT offers significant cost-cutting potential in payments, trading, settlement, and liquidity management through automation and disintermediation.
Content Overview
Document Contents
- Management Summary
- Introduction and Market Overview
- Digital Assets and the Future of Finance
- Current Regulatory Development
- CBDC: Central Bank Digital Currency
- DLT to Slash Costs and Increase Efficiency
- New Revenue Streams Through DLT
- State of Play in Europe - Opinion Poll Results
- Strategic Recommendations and Conclusion
Introduction and Market Overview
Despite the immediate economic and financial threats posed by the COVID-19 pandemic, European banks and asset managers must not lose sight of the overall increasing potential of new technologies like blockchain and distributed ledger technology (DLT).
Bitcoin, launched in 2009, was the first cryptocurrency to promise decentralization, immutability and pseudo-anonymity of transaction storage. Ethereum, launched in 2015, added smart contracts which enable general-purpose programming and conditional execution of transactions.
Today, Bitcoin has a market share of around 44%, while Ethereum with a €440 billion market cap is the second most valuable cryptocurrency. The total market capitalization of the top 100 crypto currencies amounted to over €2.2 trillion at the end of November 2021.
One of the most dynamic segments is "decentralised finance" (DeFi) - experimental finance solutions that don't rely on central financial intermediaries. As of November 2021, cryptocurrencies worth over USD 104 billion have been "invested" in various decentralised financial applications.
Digital Assets and the Future of Finance
The report identifies three main categories of digital assets:
- Crypto currencies: Digital currencies like Bitcoin and Ethereum
- Security tokens: Property rights in assets such as securities registered on a distributed ledger
- Stable coins: Crypto currencies designed to minimize price volatility relative to stable assets
Market experts predict that the combined market value of crypto currencies and security tokens in Europe will reach €1.4 trillion in 2024.
Current Regulatory Development
In September 2020, the European Commission issued a comprehensive package of measures to enable and support the potential of digital finance. The digital finance package includes:
- Digital operational resilience
- Markets in crypto assets (MiCA)
- DLT market infrastructure
- Retail payment strategy
These regulations aim to create a level playing field for all market participants while ensuring consumer protection.
CBDC: Central Bank Digital Currency
Central bank digital currencies (CBDCs) represent the digital form of risk-free central bank money. Unlike cryptocurrencies and stable coins, CBDCs are issued by central banks.
Key motives for issuing retail CBDCs include:
- Expanding financial inclusion
- Increasing efficiency and stability of payment systems
- Reducing costs of managing and transferring cash
- Enabling immediate money injections during crises
The ECB published its "Report on a digital euro" in October 2020 and has been investigating the potential implementation of a digital euro.
DLT to Slash Costs and Increase Efficiency
Digital assets based on DLT offer financial institutions the chance to counter increasing margin pressure by significantly cutting costs. The key features of DLT can only be leveraged by building strong ecosystems, setting standards for the entire industry and establishing a reliable regulatory framework.
The distributed nature combined with cryptography has the potential to increase security on a ledger level and lead to a more resilient financial market infrastructure. Smart contracts can streamline and slim down processes by eliminating certain manual process steps.
The report provides a use case of "smart derivative contracts" that demonstrates how DLT can optimize OTC derivatives trading by automating key components of the derivative transaction lifecycle.
New Revenue Streams Through DLT
The impact of DLT on the financial market is not limited to efficiency gains. Financial institutions can also exploit completely new revenue streams through:
- New assets in form of security tokens
- Real digitization/digitalization
- DeFi opportunities (deposits, loans, staking)
- Tokenization of bonds and notes for corporate clients
- Expanded investment universe through tokenization of illiquid assets
For asset managers, distributing fund products on a blockchain can significantly impact the customer approach and open up new customer groups.
State of Play in Europe - Opinion Poll Results
KPMG conducted an opinion poll with 20 leading financial institutions from six different countries across Europe. Key findings include:
- Regulatory uncertainty is the main reason why customers hesitate to invest in digital assets
- 83% of participants expect regulatory certainty to be established by 2026
- 63% of respondents are looking to increase efficiency when investing in DLT
- Real estate, financial instruments and credit contracts have the greatest potential for tokenization
- 79% of respondents are already working with FinTechs or planning to cooperate with them
Strategic Recommendations and Conclusion
Based on the analysis, KPMG provides strategic recommendations for financial institutions:
- Develop a thorough understanding of regulatory frameworks
- Analyze potential arising from DLT for future competitiveness
- Optimize operations and value chains through DLT implementation
- Consider partnerships with FinTechs to access necessary skills
- Explore tokenization opportunities for traditional assets
- Develop a strategic roadmap for digital asset positioning
The report concludes that every European bank and asset manager must have a strategic roadmap to position themselves in the evolving digital asset landscape to remain competitive.
Note: The above is only a summary of the report content. The complete document contains extensive data, charts, and detailed analysis. We recommend downloading the full PDF for in-depth reading.