Institutional DeFi Milestones: A 2021 Review
While non-fungible tokens (NFTs) ruled the retail investor’s mind in 2021, it was decentralized finance (DeFi) that was at the forefront of institutional interest last year.
Institutional investors, who may have been skeptical about the investment opportunities of DeFi earlier, have now come to recognize the growth of Web3 and its related financial instruments powered by DeFi to be inevitable. They may not yet fully understand the drivers behind DeFi or Web3, but learned that the asset class cannot be ignored.
As a result, institutions dominated DeFi transactions in the second quarter of 2021, according to data from Chainalysis, a blockchain data platform. Large institutional transactions, which are transactions above $10M, accounted for over 60% of all DeFi transactions over this period.
Part of the attraction of DeFi for institutions are the high yields offered across the sector, when compared with returns from traditional finance (TradFi) instruments. These higher yields become even more lucrative as increasing inflation cuts into gains from TradFi instruments.
Whether it was the Office of the Comptroller of the Currency allowing US banks to settle payments using stablecoins, or payments processor Visa settling the first crypto transaction, 2021 was a year of many firsts in institutional DeFi.
Here, we take a look at some key events in different financial sectors that point towards rising acceptance of DeFi as an investment sector within institutional finance.
Investment banks and asset managers have had a push-and-pull relationship with DeFi. While the high yields offered an attractive opportunity for these banks, the regulatory and technology uncertainty involved kept them away from the ecosystem. 2021 changed that. Many investment banks–including Blackrock, BNYMellon, and Goldman Sachs–either revived their crypto desks, or entered the space.
The year began with the news that Blackrock had filed with the SEC to add bitcoin exposure to two of its investment funds. The world’s largest asset manager also invested $384M in bitcoin mining companies last year, its regulatory filings showed. In a push towards greater acceptance of crypto as an investment, BNY Mellon, the oldest bank in the US, formed a new digital assets unit, to provide services around bitcoin and other digital currencies.
Both Morgan Stanley and Goldman Sachs decided to offer their wealth management clients access to bitcoin exposure. Meanwhile, the European Investment Bank, the investment arm of the European Union, issued its first ever digital bond, worth 100M euros, on public blockchain. Societe Generale, France’s third-largest bank, also proposed to borrow $20M in Dai from MakerDAO, one of the largest DeFI protocols.
From calling digital currencies a “fraud”, to offering custodial services for their digital assets to clients, retail banks have come full circle in their relationship with digital currencies. In 2021, many retail banks either started offering bitcoin exposure, or considering such exposure for clients.
JPMorgan Chase said in January that it may offer some clients the opportunity to invest in bitcoin funds. Similarly, Citibank launched a digital assets unit offering crypto investment services amid increasing interest from its clients.
JPMorgan did not just stop at bitcoin funds. Later in the year, it partnered with Wells Fargo and NYDIG to offer bitcoin exposure to their respective clients. In addition, JPMorgan launched an in-house bitcoin fund for its private banking clients.
In 2021, the walls between the DeFi and the TradFi worlds became increasingly porous. While institutions tested crypto waters, DeFi companies welcomed both venture capital, and human resources from the TradFi world.
Crypto exchange FTX brought in Brett Harrison as its first president. Harrison joined FTX from Citadel Securities, a leading global market maker. The company also hit $25B in valuation, when it raised $900M in July 2021.
In another vote of trust for DeFi, crypto custodian Anchorage’s proposal to become a digital bank was approved by the US finance regulator in January 2021. Anchorage ended the year at a $3B valuation after it raised $350M in December 2021.
2021 was also a blockbuster year for ConsenSys. ConsenSys ended the year with a $3.2B valuation. The company’s famous crypto wallet, MetaMask, continued on its growth trajectory, reaching over 21M users as of November 2021. MetaMask Institutional partnered with three leading custodians: BitGo, Qredo, and Cactus Custody to support institutional firms engaging with on-chain protocols.
In another first for DeFi, Swiss digital bank Sygnum said it would allow its customers to stake their ETH through its institutional banking platform. Crypto trading platform Bullish and Circle announced plans to go public via SPACs, while USDC-backer Circle also planned to become a full-reserve digital bank.
The Time for DeFi has Come
In 2021, many leading institutions shifted away from skepticism and took meaningful steps into the DeFi and Web3 ecosystem with business model pivots and capital deployment.
A whopping 90% of crypto’s largest deals happened in 2021, according to a Messari report. And this 90% did not even include Coinbase’s direct listing, which valued the crypto exchange at nearly $86B.
These strides are strong indicators of the upwards journey of institutional interest in 2022. According to an Intertrust survey, hedge funds plan to hold an average of 7% of their holdings in cryptocurrencies by 2026. The long-term growth opportunity for DeFi can be gauged from the fact that the market cap of all DeFi protocols ($149B at the end of December 2021) is less than 1% of that of global banks—highlighting enormous room for growth.
Organizations can embark on their journey into DeFi with MetaMask Institutional (MMI), a DeFi wallet and Web3 gateway built for institutions. MMI offers unrivaled access to the DeFi ecosystem, without compromising on institution-required security, operational efficiency, or compliance requirements. It enables crypto funds, market makers, and trading desks to trade, stake, borrow, lend, invest, and interact with over 17,000 DeFi protocols and applications.
A comprehensive list of Institutional DeFi milestones in 2021
- BlackRock files with SEC to invest in bitcoin futures for two of its funds
- Anchorage becomes first federally chartered digital asset bank
- OCC provides guidance, allowing US banks can conduct payments using stablecoins
- SkyBridge launches Bitcoin fund with $310mm AUM
- Osprey Funds launches OTC bitcoin trust, competitor to GBTC
- BNY Mellon forms new digital asset unit
- MasterCard to enable crypto purchases for all merchants
- BlackRock begins purchasing bitcoin
- Deutsche Bank plans to offer crypto custody and prime brokerage
- Morgan Stanley offers its wealthy clients access to bitcoin funds
- NYDIG raises $200mm from Morgan Stanley, New York Life, MassMutual, Soros Fund
- Visa to enable bitcoin purchases at 70mm merchants
- Visa settles USDC transaction on Ethereum
- Goldman restarts crypto desk and explores digital asset custody
- Oaktree Capital founder, Howard Marks changes his mind about bitcoin
- Financial Action Task Force drafts 2021 crypto guidance
- Goldman prepares to offer crypto to wealth management clients
- Morgan Stanley files to add bitcoin exposure across a dozen institutional funds
- JPMorgan plans to launch active bitcoin fund
- NYDIG raises $100m from Liberty Mutual insurance, Starr insurance and New York Life
- Consensys raises $65m with JPMorgan, Mastercard, UBS, Others
- Baillie Gifford leads $100mm investment in Blockchain.com
- Rothschild Investment Trust takes stake in Kraken
- European investment bank Sells EU100m bonds on Ethereum network
- Brevin Howard hedge fund to begin buying crypto
- Dan Loeb’s Third Point files as a Coinbase custody customer
- University of Wyoming allocates $4M to staking
- Hedge Funds: Point72, Millennium and Matrix setting up crypto funds
- Bridgewater CFO leaves to become CFO of NYDIG
- FTX.US hires Citadel Securities executive as president
- A16Z raises $2.2bn Crypto Venture Fund
- World’s Largest Interdealer Broker, TP ICAP to launch crypto trading with Fidelity and Standard Charter
- State Street creates a cryptocurrency division
- Soros Fund management starts trading bitcoin
- Texas department of banking to allow chartered banks to custody crypto
- Bitwise Raises $70m from Kravis, Druckenmiller and Bridgewater CEO David McCormick
- Crypto lender BlockFi launches institutional investor platform
- Citibank launches digital assets unit, confirming crypto plans
- ProFunds launches first publicly available BTC mutual fund in U.S.
- Fidelity Digital Assets to add 100 employees
- Swiss bank Sygnum becomes first bank to offer ETH 2.0 Staking
- Goldman survey finds half of investors plan to buy crypto
- Cryptocurrency firm Bullish to go public in $9 bln SPAC deal
- FTX closes $900 million funding round at an $18 billion valuation
- USDC stablecoin backer Circle to go public in $4.5B SPAC deal
- Ethereum DeFi pioneer Maker Foundation is shutting down, DAO will take over
- Morgan Stanley funds add more than 2.64M shares of GBTC
- Wells Fargo and JPMorgan partner with NYDIG to launch Bitcoin funds
- JPMorgan launches in-house Bitcoin fund for private bank clients
- Circle plans to become a full-reserve national digital currency bank
- Interactive Brokers introduces crypto trading through Paxos
- SEC is investigating decentralized crypto exchange developer Uniswap Labs: Report
- MetaMask Institutional announces the integration of BitGo, Cactus Custody, and Qredo
- ProShares Bitcoin ETF reach $1 billion in AUM in two days
- Pimco announces it is investing in crypto
- Houston Firefighter’s Pension makes Bitcoin and Ether purchase
- Bank of America releases launches coverage of Digital Assets
- Stripe creates new team focused on building Web3 payments
- U.S. Bank announces new cryptocurrency custody services
- FTX raises over $420 million, reaches $25 billion valuation
- MetaMask surpasses 21 million MAUs as ConsenSys raises $200 million
- Valkyrie launching $100m on-chain DeFi fund
- Citigroup alum Matt Zhang launching $1.5b crypto fund
- Grayscale launches Solana Trust
- A hedge fund billionaire outbid crypto investors for a rare copy of the US Constitution