December 12, 2023

M&G; Basel; Franklin Templeton

Welcome to Swarm Markets’ media memo. This weekly update provides comments from Swarm Markets’ co-founders, Philipp Pieper and Timo Lehes, on key industry news that has caught our eye, plus our own developments.

Comments available on the following news items:


  • M&G cites regulation as reason for investing in digital assets
  • Worrying implications of Basel recommendations for banks’ participation in digital assets
  • What crypto Franklin Templeton’s CEO is investing in


M&G investing in digital assets thanks to regulatory protection


Regulation of crypto has been one of the talking points this year and this is no surprise when you consider the 2022 that the sector had. We’re close to the end of 2023 and it does now feel as if the market has turned a corner in terms of jettisoning the riskier and stranger ends of the market.


Institutional involvement and investment in the space is moving at pace. And true to what the pro-regulation camp has been saying for some time, far from stamping out the sector, it is this regulatory protection that is driving such investment.  


M&G has just announced, for example, an investment into a digital asset derivatives venue, GFO-X. While such activity is par for the course in the financial world, what makes it interesting is M&G’s explanation for its investment. 


The asset manager says: “The lack of regulated trading venues is materially hampering the growth of the crypto derivatives trading market. The UK has the potential to become a global hub for crypto asset technology and investment.”


This would appear fairly conclusive – regulation by authorities such as the FCA is driving investment and expansion from major institutional players into the digital assets realm. Going into 2024 this is extremely encouraging to see for a sector that has been battered but appears to finally be flourishing anew. 


Basel recommendations could be a big problem for banks participating in the lucrative tokenization market 


The Basel Committee on Banking Supervision’s (BCBS) “Basel recommendations” are developed with the aim to safeguard the banking system from potential instabilities arising from crypto-asset transactions.


The new recommendations from earlier this year titled “Prudential treatment of cryptoasset exposures” contain huge capital requirements of up to 1250% if banks use products operated on a public DLT. Now, for certain risky crypto assets that may be justified, but the way it’s written it leaves room to include tokenized securities, stablecoins, deposit tokens and nearly anything, that is using a public or private blockchain.


As much as such recommendations aren’t direct legislative precursors, it is prudential to local regulatory authorities of member nations of the Bank for International Settlements (BIS) to generally follow these recommendations. If implemented as proposed, it would bar banks from holding any digital assets and from using blockchain based products. Effectively banks would be shut out of the lucrative market of tokenization entirely. 


While the initiative is going to raise the regulatory drawbridge high enough to make many of the digital asset holdings of institutions potentially untenable, or subject to the whim of regulatory winds. 


While this could be immensely beneficial to pure play vendors, consumers and the market will lose out as important trust layers of the ecosystem are taken out of the system.


Franklin Templeton CEO holds crypto 


While not a direct indicator of what asset managers are doing, the suggestion that major figures in some of the biggest investment firms in the world are holding cryptoassets personally is extremely encouraging to hear.


Franklin Templeton CEO Jenny Johnson reportedly holds bitcoin, ether, UNI and SUSHI – an interesting mix of both big and smaller crypto assets. Johnson told Fortune in an interview that although it was a small holding, she clearly has a stake in the market.


Beyond that she said the firm is actively investing in blockchain and the securitization of non-correlated assets. We’re heard plenty from major and very traditional institutions about investing into the sector, but it is notable to see that senior individuals themselves are invested in the space. 


Johnson’s comments are revealing too because she’s clear that her strategy is to invest in things that are anchored by financial returns. This is probably the most exciting growth area for the crypto asset space – the tokenization of real world assets (RWAs). 


As we’ve argued for some time, the signs are there that the lines between TradFi and DeFi will continue to blur in the near future as traditional institutions look more to decentralised infrastructure to conduct business and custody assets.