Canada’s investment sector (re)embraced cryptoassets in 2023, new poll shows

Half of financial services respondents offered cryptoasset services in 2023, and nearly four in 10 institutional investors had exposure to crypto, KPMG in Canada and CAASA survey finds

Canadian institutional investors and financial services organizations jumped back into cryptoassets in 2023 as the industry recovered from a tumultuous period with a market rally, better regulatory clarity and new innovations in digital assets.

According to a bi-annual survey conducted by KPMG in Canada and the Canadian Association of Alternative Assets and Strategies (CAASA), 22 per cent more financial services organizations offered cryptoasset products and services to clients last year than in 2021, and 26 per cent more institutional investors included cryptoassets in their portfolio last year than in 2021. The survey collected responses from financial services organizations and institutional investors operating in Canada.

Half of respondents in financial services said their organizations were actively offering at least one type of cryptoasset product or service to clients, up from 41 per cent in 2021. Among institutional investors, nearly four in ten (39 per cent) reported having direct or indirect exposure to cryptoassets, up from 31 per cent in 2021.

“The last time we did this survey in 2021, it was a strong year for cryptoassets. The following year was a turbulent year, marked by fraud and collapses of major cryptoasset trading firms, but those events had a cleansing effect on the industry,” says Kunal Bhasin, partner and co-leader of KPMG in Canada’s Digital Assets practice.

“Rising U.S. debt combined with increasing inflation likely provided a catalyst for the crypto rally of 2023, and it appears investors are looking for alternative asset classes that act as a debasement hedge and a reliable store of value. Our survey findings suggest cryptoassets are increasingly seen as an investible alternative asset class among such institutional investors and financial services organizations in Canada,” Mr. Bhasin added.

Kareem Sadek, Emerging Technology Risk leader and co-leader of KPMG’s Digital Assets practice adds: “Canada has played a leading role in creating a regulatory environment that supports innovation in cryptoassets, from approving the first Bitcoin and Ethereum exchange-traded funds to allowing sophisticated strategies involving derivatives and Ethereum staking. Those actions, along with rising prices for cryptoassets are likely reasons why institutional investors have been increasingly attracted to the crypto space.”

Financial services

• 50 per cent offered at least one type of cryptoasset service (up from 41 per cent in 2021)
  • 52 per cent offered cryptoasset trading (*no comparable from 2021)
  • 48 per cent offered custody, clearing or settlement services (vs. 33 per cent)
  • 38 per cent offered quantitative trading (vs. 11 per cent)
  • 14 per cent offered wealth management or financial advice (vs. 42 per cent)
  • 24 per cent issued ETFs or regulated products (vs. 25 per cent)

Institutional investors

• 39 per cent reported direct or indirect exposure to cryptoassets in 2023 (up from 31 per cent in 2021)
  • 75 per cent owned cryptoassets directly (vs. 29 per cent)
  • 50 per cent had exposure through exchange-traded funds, close-ended trusts or other regulated products (unchanged)
  • 58 per cent had exposure to crypto-related public equities (vs. 36 per cent)
  • 25 per cent invested as a limited partner in a venture capital or hedge fund (vs. 29 per cent)
  • 42 per cent reported exposure through derivatives (vs. 14 per cent)

Financial services organizations offered a range of cryptoasset investment services to clients, with an average of two to three service offerings per respondent, up from an average of one to two services in 2021. Client demand for cryptoasset services was a significant driver, with eight in 10 financial services respondents citing it as a major factor in their expansion of cryptoasset services - up from half in 2021.

The three most common types of services offered by financial services organizations included:

1. Cryptoasset trading
2. Custody, clearing and settlement services
3. Quantitative trading

Less common services offered included financial advice and wealth management services, equity and debt capital market transactions for cryptoasset companies, and commercial banking services for cryptoasset organizations.

“Traditional financial institutions are increasingly recognizing the need to provide cryptoasset services to meet customer demand. Even so, Canada’s large financial institutions will need to become more comfortable with the unique challenges related to anti-money laundering and financial crimes that are posed by cryptoassets before they offer more commercial banking services to crypto companies,” says Mr. Sadek.

Institutional investors are growing their investments in cryptoassets and employing more investment strategies than two years ago. One third said they’ve allocated 10 per cent or more of their portfolios to cryptoassets – up from a fifth two years ago.

Investors are using a number of strategies to gain exposure to cryptoassets, including direct ownership, and investing in regulated products such as ETFs, public equities and derivatives.

More than two thirds (67 per cent)of investors cited the maturing market and custody infrastructure as key reasons behind their first investments in cryptoassets - up from 14 per cent in 2021. More than half (58 per cent) also cited strong market performance – up from 21 per cent in 2021. The price of Bitcoin climbed 150 per cent in 2023 and so far in 2024, it’s up by 50 per cent.

“A pivotal moment for cryptoassets came in January 2024, when the U.S. Securities and Exchange Commission (SEC) approved spot Bitcoin ETFs. That was considered a milestone event for many market participants. That attracted many traditional asset managers with strong reputations to the cryptoasset industry,” says Mr. Sadek, adding that an Ethereum ETF is also expected to be approved in 2024.

Mr. Bhasin says he expects more financial institutions and investors to increase their exposure to cryptoassets in 2024. Before making the investment, he advises them to:

• Seek education on the cryptoasset industry (through workshops, conferences, etc.)
• Create a strategic vision and roadmap for cryptoasset investments or offering cryptoasset services
• Develop proof of concepts and solutions to achieve production-grade offerings
• Research, seek and assess a range of service providers to help implement a cryptoasset strategy, and ensure they meet operational and regulatory requirements
• Establish internal policies and controls (such as anti-fraud controls) to meet management, industry and regulatory requirements
  

For more insights on the institutional adoption of cryptoassets in Canada, see KPMG in Canada’s latest article, With rising cryptoasset adoption in Canada, there’s reason for optimism.

The 2023 Institutional Adoption of Cryptoassets survey was conducted by KPMG in Canada and the Canadian Association of Alternative Assets and Strategies (CAASA), targeting institutional investors and financial services organizations with operations in Canada. The survey yielded 65 responses (31 identified as institutional investors and 34 identified as financial services organizations). Institutional investors included: hedge funds, family offices and high net worth individuals, pension funds, endowment and foundations, private equity and venture capital firms.

Of institutional investors, 48 per cent had $500 million or less in assets under management; 29 per cent had between $500 million to $2 billion; 13 per cent had between $2 billion to $20 billion; three per cent had between $20 billion to $50 billion; and six per cent had more than $50 billion in AUM. Financial services organizations included: asset management, capital markets, wealth management, financial advisors, custody, clearing, brokerage, insurance, commercial banking, and market infrastructure. Of financial services organizations, 56 per cent had $100 million or less in annual revenue; 29 per cent had $100 million to $1 billion; nine per cent had between $1 billion to $10 billion; and six per cent reported more than $10 billion in revenue. Responses were collected from June 9,, 2023 to December 1, 2023.