Inkoo Kang, Grayscale Investments writes that it has certainly been an eventful year so far in all segments of the market. There have been a multitude of factors – macro and micro – weighing on investors throughout 2023, ranging from stubbornly high inflation, monetary and fiscal policy, and mixed economic data. Most recently in March 2023, there were meaningful signs of the economic impact of rate hiking activity over the last 12 months with stresses emerging in the US banking system. The impact was particularly relevant across regional banking institutions that relied more heavily on traditional borrowing and lending businesses compared to more diversified financial services franchises.
All of this resulted in a first quarter of 2023 that was packed with ebbs and flows, shifting sentiment, and mixed results. The backdrop can simply be summarised in a single word: uncertainty. Amid all the uncertainty, though, risk assets delivered notably strong results through the first few months of the year, and long-term continue to look for avenues to introduce growth across their equity allocations. Thematic exposures have continued to stand out as an area where investors can find access to nuanced exposures that cut through traditional sector and industry classifications, factors, or geographic constraints. Widely followed thematic exposures span nascent and emerging technologies, evolving consumer behaviours, advancements in healthcare, and structural developments in transportation and energy, to name a few examples. The Future of Finance was a theme that especially stood out, in more ways than one.
The Digital Economy and the Future of Finance
The Future of Finance theme represents the intersection of Finance, Technology, and Digital Assets; companies that are driving innovation and transformation in the modern financial system; creating the Digital Economy of tomorrow. The confluence of all three “sectors” is where we find companies that are steadily building a new infrastructure that may, someday, run and operate significant portions of the global financial system. These companies span segments of the Digital Economy such as Payment Platforms, Exchanges, Miners, Asset Managers, and Blockchain Technology companies.
Change (and the adoption and maturation of change) tends to occur over phases, and the emerging Digital Economy has already offered a glimpse into the ability for disrupting traditional product or service models. Digital networks to service capital raising and liquidity needs quickly became a key service for Future of Finance companies – traditional borrowing and lending models and relationships are being re-written. Tokenization is gaining momentum, even if it is starting with assets with existing access or liquidity pipelines; Goldman Sachs took its Tokenization Platform GS DAP live in January 2023 with the issuance of a EUR100million, two-year digital bond touting features such as security, scalability, efficiency, and settlement velocity. Digital Asset Exchanges require more policies and procedures, but investors and industry participants are already realizing the potential for Exchanges to take on roles previously held by brokers and custodians.
Accessing Growth via the Future of Finance
As the Future of Finance progresses, efficiency and speed are clearly not the only benefits. The Digital Economy is on a path to transform asset servicing models, including accounting, record-keeping, ownership, voting, and other functions. At Grayscale, we expect to see this transformation continue across a more global fashion, not just limited to certain geographies. All of this results in the potential for a very attractive growth profile for Future of Finance companies throughout the next decade. Revenue from business activities, products, and services across the Digital Economy is expected to show a compounded annual growth rate (“CAGR”) of 16.09 per cent to USD 99.5 billion by 2027.
Today and Tomorrow
Today, the Future of Finance theme remains a nascent and emerging one, but it is a theme that is showing impressive velocity in both growth and adoption. Many projects, products, and solutions are still in production and testing phases, and investors should be mindful of the duration associated with the development and maturation of the Digital Economy and the companies around it. In a short period of time, there have been measurable successes and setbacks across several sub-themes within the Future of Finance, most notably in March of 2023 with Asset Management and Banking institutions coming under pressure, and even taking some services offline.
We continue to see companies prioritising and building for the Future of Finance, and we appear to be well past the phase of access or identifying the Digital Economy as a new industry and asset class. It is an exciting time for these companies as they work towards building value-added services and introducing new solutions around banking, payments, custody and settlement, reporting, and the like. Because of the runway and potential for these solutions, the Future of Finance theme, amid all the uncertainty in 2023 thus far, has been a leader across a plethora of thematic exposures.
