Blockchain & Crypto
Payments, Capital Markets Tech & Tokenization
The future is now.
The decentralization of financial services is no longer theoretical. It’s happening now. Real-world payments and banking applications, leveraging distributed, replicable database technology, i.e., blockchain, are being developed and deployed throughout the financial ecosystem. This is in addition to blockchain’s application to gaming, logistics, healthcare, and statement of record (SOR) use cases.
In payments, the disintermediation of financial institutions, correspondent banking networks, and debit and credit card schemes, imply a compelling use case for blockchain and cryptographic tokenization, which offer greater security and execution speed than legacy infrastructures, at a lower cost. These technologies also offer greater access to financial services for the unbanked and underbanked. This is why usage has accelerated in regions with immature and unsophisticated financial infrastructure, as well as regions where untrustworthy governance presides over the existing banking and financial systems.
Where blockchain and tokenization are still lacking (with particular regard to payments), is in transactional throughput. These nascent systems can’t process large amounts of payments transactions fast enough. But they are evolving quickly and newer technologies are already emerging, such as Layer 2. The price volatility of the native tokens of the largest public blockchain protocols – Ethereum and Bitcoin – are also a drag on adoption, though stablecoins (like Circle’s USDC) and utility tokens (like Ripple’s XRP) are addressing this issue, especially in the high demand use cases of cross border, B2B payments, payouts, and remittances.
In the capital markets space, the creation of self-executing contracts (smart contracts) and the evolution of decentralized applications (dApps) portend a wholesale disruption of existing technologies. Whether using private, permission-based blockchains or account abstraction, the ability to streamline trade execution and offer 24/7 programmable settlement with blockchain technology is a game changer.
There’s also the tokenization of real world assets (RWA), from health records and titles and deeds, to commercial bank money, wholesale bank money, U.S. Treasuries and investment-grade debt. The tokenization of the latter is being explored today between the Fed, commercial banks, and card schemes (Mastercard) in the context of a Regulated Settlement Network (a shared ledger) – current modalities settle across three distinct rails. Tokenization and the ability to settle and memorialize transactions on blockchain is a major advance in efficiency, security, and convenience.
Are blockchain startups too early in the tech cycle to be banked?
Not at all.
Even though the first cohorts of blockchain/crypto infrastructure companies are still in their infancy, they are getting serious attention from early-stage venture funds, strategics, and angels. And, despite the crypto-industry fiascos of late 2022 and early 2023 (FTX, Silvergate Bank, Signature Bank), LPs are no longer spooked by the sector. These events had the salutary effect of washing out the wildly speculative ICO schemes, fraudulent operations, and fraudulent operators, leaving a legitimate grouping of winners in their wake. These winners, mostly builders of blockchain and web3 infrastructure firms, are thriving, and it won’t be too long before they sufficiently scale into the area of the market where growth equity funds will engage.
The takeaway.
Investors are putting capital to work in this nascent sector, with a focus on allocating to the startups building the infrastructure for this transformational new way of conducting commerce and finance. In payments and capital markets technology, gateways, wallets, custodians, exchanges, on/off-ramps, payment processors, stablecoin issuers, compliance and risk monitors, specialty KYB, KYC, and AML providers, are all contributing to accelerated adoption, with increasing market demand pulling them forward.
Blockchain technology and encrypted digital asset value transfer sit at the leading edge of fintech, payments, and markets’ technology. Though highly speculative just a few years ago, these assets are now marketable and investable.
Wellesley Hills is bullish about this breakthrough technology, its applications, and its adoption, and we are optimistic about the opportunities it will create for our financial sponsor, strategic, and startup clients.