October 4, 2023

Insights and analysis for the professional investor

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Welcome to Crypto Long & Short!

This week, CoinDesk's Amitoj Singh interviews a senior executive at DBS, the Singapore-based bank moving into digital assets.

Then, Erik Anderson of Global X explains how volatility – something many investors are scared of – can be a very good thing in crypto.

As always, get the latest crypto news and data from CoinDeskMarkets.com.

– Nick Baker

From the Analyst

Asian Banking Giant DBS Is Patiently Wading Into Crypto

SINGAPORE – As Singapore geared up for the riveting speed of the Formula One weekend in mid-September, crypto-related entities were racing toward opportunity at the Token2049 conference. One seasoned traditional finance player wasn't in much of a rush, though.

Singapore-based DBS Bank, a regional banking behemoth headquartered in the same venue as the conference, Marina Bay Sands, holds all three licenses required to let clients buy traditional securities using stablecoins. But it isn't doing so yet, even as competitors move ahead.

The only other entity that holds all three licenses in Singapore, MetaComp, told CoinDesk at Token2049 that it was the first to let their clients pay for securities with their crypto holdings – albeit by first converting the stablecoin to fiat.

Moments later, CoinDesk asked Evy Theunis, head of digital assets at DBS' institutional banking group, why the company hadn't entered this crypto triathlon, despite appearing fit to do so. Currently, DBS provides digital asset custody, a digital exchange for listing and trading, security tokens and the ability to manage traditional assets alongside a crypto portfolio using the same app.

"I like your triathlon analogy," said Theunis. "But I'd say while it's still winter, we have been swimming. Maybe it's fair to suggest we're not going as deep as some of the very focused players,, but we're still doing a lot, getting our hands dirty for the long run."

The technical reason for not offering the stablecoin service, Theunis explained, related to how DBS tracks any tokens it processes. For non-stablecoin cryptocurrencies, DBS traces every wallet a token has ever touched before it enters the token into its system.

"Can you imagine doing that for stablecoins? That was a technical difficulty because stablecoins are multichain, they cross bridges, etc.," Theunis said, adding this is why, for some time now, DBS has only offered bitcoin (BTC), ether (ETH), XRP, bitcoin cash (BCH), DOT and ADA trading, because "we want everything that comes into the bank to be foolproof."

In sporting terminology, DBS, a major player in China, Hong Kong, Indonesia and South Korea, is arguably the Eliot Kipchoge of finance in the region. If digital assets were a triathlon, it may not be the reigning champion, but it sure knows how to win. Given crypto's volatility, DBS' brand recognition as the "safest bank in Asia" for 14 consecutive years makes every step it takes towards crypto a giant step towards legitimacy for the space.

DBS started its digital asset platform, DBS Digital Exchange, in 2020, Theunis said. "We go into things early, not to run sprints but to see how things evolve," she said.

In a panel at Token2049, she revealed that digital assets under custody at DBS grew around 150% year-on-year as of the end of the second quarter. For comparison, BTC and ETH prices rose 50% and 80%, respectively, in the same period, according to CoinMarketCap.

Theunis is at the helm of DBS' digital assets journey. She originates from Brussels, but given she's been based in Singapore for almost a decade, she is a unique leader bridging the gap between the West and East's understanding of crypto.

"The whole ecosystem benefits when regulators and the industry collaborate closely, and this is evident, especially in Singapore," Theunis said. "This relationship-led approach is a key driver of innovation and could be a model for other jurisdictions."

DBS' largest and controlling shareholder is the Singapore government-owned Temasek Holdings. It's no surprise then that its digital assets strategy appears to walk in step with the monetary policy of the region.

This became apparent most in February 2022 when DBS' Piyush Gupta revealed plans to launch retail digital asset trading by the end of the year. But shortly after, two major entities with close ties to Singapore, stablecoin issuer Terraform Labs and crypto hedge fund Three Arrows Capital (3AC), collapsed. Singapore tightened its regulation, censured 3AC and proposed stablecoin rules to reign in the sector. DBS' retail trading plans have been suspended since.

"Right now we are focusing on institutional players, continuing to evolve on the accredited investor side," Theunis said as she reiterated DBS wasn't going to start retail trading of digital assets. "Not so long ago, we enabled all our qualified accredited investors to buy digital assets on the exchange."

Without naming any of its institutional customers, Theunis said, "we've seen how a lot of traditional players have readied themselves, but they've not been really active" in crypto, reflecting how it's not just DBS that's playing the wait-and-watch game.

DBS is also heavily entrenched in government-related projects in the space – Project Orchid uses programmable money for government vouchers, while Project Guardian saw a tokenized version of the Singapore dollar bought for tokenized Japanese yen. It also completed an e-Chinese yuan transaction for a client in China, and for shipments between Singapore and India, it completed the first "live" transaction of electronic Bills of Lading (eBL), which are essential documents in shipping.

Historically, scalability has been a problem for this kind of transaction but that problem was solved by issuing title ownership of the eBL as a non-fungible token (NFT) on Polygon.

"Institutions like ours are dependent on builders to make blockchain technology ready for scalable adoption, like with eBLs on a blockchain. That's why we are participating in all these initiatives to bring together and work with builders," Theunis said. "I would encourage builders to talk to institutions more about their use cases, which will take time."

— Amitoj Singh, regulatory reporter at CoinDesk

Institutional Outlook

Volatility and Risk Get a Bad Rap in Investment Portfolios, Particularly When It Comes to Digital Assets. Here's Why They Shouldn't.

Deciding to invest in the fast-paced, ever-evolving digital assets market can seem daunting. In the past, people were often hesitant to invest in digital assets – namely cryptocurrency – because of their inherent volatility and associated risk. But the tides are changing, particularly as the global cryptocurrency market has grown into a flourishing, multi-sector ecosystem since bitcoin's (BTC) 2009 debut.

Below, I break down – and debunk – some common misconceptions about the potential risks that investors assume while gaining exposure to the digital assets ecosystem.

Volatility is always a bad thing (FALSE)

The term "volatility" often comes with a negative connotation, but that's not always the case. Investors can experience swings up or down; it's important to remember that there is upside potential, too.

For example, bitcoin has been called the best-performing asset of the decade, yet its price heavily depends on a number of factors, including supply and demand, investor sentiment and the media hype cycle. Even the most-prominent and well-capitalized cryptocurrency experiences fluctuations, resulting in positive returns and, at times, losses.

When an investment portfolio is constructed in a professional manner, volatility has the potential to be a portfolio enhancement rather than a disadvantage. That's because advisers have the expertise to help by setting frequent rebalances and buying and selling orders at certain thresholds. We've seen this play out time and time again as the adoption curve for digital assets has ramped up over the years.

Digital assets always carry too much risk (FALSE)

Investors should aim for a balanced portfolio, meaning one that isn't dominated by a certain asset class (whether digital assets or otherwise). Diversification is key. Adding alternatives to a portfolio can not only help avoid concentration risk but also hedge against inflationary environments.

Around a 2% allocation to digital assets is often standard in an investment portfolio. To some, that may seem like an insignificant percentage. But in practice, that often means the downside risk is minimized and the potential upside is tremendous; even a 2% bitcoin allocation in a standard portfolio over the last five years would have driven a significant share of the portfolio's growth.

An allocation that small – regardless of how powerful it can be – shouldn't take up the vast majority of an investor's time or energy. Instead, financial advisers can help ensure portfolio construction is purposeful, rather than ad hoc. Advisers take on the management burden by keeping track of market conditions and recommending a rebalance schedule that works for the individual investor and their specific financial goals.

Digital assets will never become a mainstream investment (FALSE)

Some risk-averse investors likely have exposure to the digital assets industry without realizing it. That includes established, highly trusted brands that are historically slower to embrace disruptive technologies. For instance, global payments giant Visa recently announced an expansion of its stablecoin settlement capabilities, becoming one of the first major payment institutions to do so.

Although the industry is still in its infancy, the possible use cases are vast. And the investment opportunity is exciting – despite (and, in some instances, because of) volatility and risk.

– Erik Anderson, digital assets research analyst at Global X

Takeaways

From CoinDesk Managing Editor Stephen Alpher, here is some news worth reading:

SBF ON TRIAL: It's been nearly a year since the collapse of crypto exchange FTX and this week, the trial begins for ex-CEO Sam Bankman-Fried over the alleged theft of billions of dollars of customer funds. Among those testifying against SBF will be former colleagues and friends, some of whom have struck plea deals with the U.S. Department of Justice. Perhaps the most interesting testimony will come from Caroline Ellison, the one-time head of FTX sister company Alameda Research, and a former romantic partner of Bankman-Fried. Coinciding with the beginning of the trial is the release of an SBF biography (hagiography?), "Going Infinite," by Michael Lewis. "If there hadn't been a run on customer deposits [at FTX], they'd still be sitting there making tons of money," said the author, who in part built his reputation by holding financial sector wrongdoers accountable. "It's enough to make a CoinDesk editor ask, maybe rhetorically, whether Bankman-Fried 'has something' on Lewis," wrote Daniel Kuhn.
ETHER ETFS: Nine futures-based ether ETFs began trading on Monday, with volume so far appearing to be modest. While some pointed out optimism surrounding these new exchange-traded funds as responsible for a surge in crypto prices late Sunday and into Monday, those with longer memories remember that the introduction of new crypto products into traditional finance has often marked price tops. Bitcoin futures began trading at the CME in late 2017, right before a long slog down in prices. Then there was ProShares' BITO, which launched as the first-ever futures-based bitcoin ETF late in 2021, shortly ahead of bitcoin's epic blow-off top around $69,000. "ETF issuers don't know the markets like traders do," Dexterity Capital Managing Partner Michael Safai told CoinDesk TV. "Their optimism is a bit misplaced; anyone who wants bitcoin or ether surely has it."

Want more? For the latest news affecting the crypto markets, listen to CoinDesk's Markets Daily podcast.

State of Crypto: Policy & Regulation

It is now more important than ever to set industry standards and align on practical short-term and long-term objectives through pointed conversations with the best legal minds and Washington D.C.'s most important decision makers.

Join us at State of Crypto: Policy and Regulation on October 24 in Washington D.C. for an unprecedented opportunity to evaluate, dissect and ultimately shape crypto regulatory frameworks that support a vibrant, secure and healthy future for the digital economy.