Insider Insights December 2019 Issue

Digital Asset Trends to Watch in 2020

Looking Forward to the Next Year and Beyond

As the current year wraps up, it would be wise to take a moment to review the advances that digital assets have made into business and investment markets over the past year. Much of the past year’s events have set the stage for further growth in 2020. Digital assets and blockchain have both made major inroads into infrastructure and are poised for great success in the coming new decade.

A Clearer Market Drives Institutional Investor Interest

A much greater level of involvement from institutional investors is expected into the digital asset space, now that regulations are being hammered out and the level of risk involved can be appropriately understood. Facebook’s Libra stablecoin was one of the big headline-grabbers of 2019, which was a move that led central banks to understand that the market could no longer be ignored. Henry Arslanian, chairman of the Fintech Association of Hong Kong, stated in an interview that as a direct result of Libra’s introduction, 70% of central banks across the world are now examining digital assets as an investment option, whereas their sentiment towards them was previously tepid at best. Arslanian went on to say that Libra has paved the way for a great deal of regulatory clarity, which means that institutions now further understand how they can safely enter the digital asset space.

Indeed, as the regulatory landscape becomes clearer, education is going to be one of the top priorities of furthering institutional interest in the digital assets space. 2019 was described as a “year of preparation” by many analysts, pointing towards Fidelity Digital Assets as an example. Tom Jessop of FDAS noted in November 2019 that “between launching our trading platform five months ago to year-end, we will have more than doubled the number of liquidity providers.” He adds that “we’ve been surprised over the course of the year about the level of interest and amount of work people have done to understood the asset class.” Jessop added that FDAS plans to continue to pursue licensing in new states and expanding its market reach proceeding into 2020.

The greatest obstacle that institutional investors have regarding the digital asset space is a lack of understanding. However, sentiment from institutions has continued to warm over time; both as the digital asset space continues to grow as a viable market option and as they continue to gain an understanding of its nuances from a regulatory standpoint. These concerns will become less of an obstacle as institutions continue to gain understanding in 2020 and beyond.

Further Iterative and Progressive Development into Business Processes

Research and advisory firm Gartner, Inc. reports that blockchain usage in business processes has been growing steadily over the past few years. However, one of the most pressing obstacles that will hopefully be overcome is the fragmented and overlapping nature of blockchain platforms. Gartner reports that by 2021, 90% of current blockchain implementation platforms will need to be replaced over the next 18 months to ensure that they remain competitive, secure, and relevant. Despite these challenges, Gartner also reports that the number of blockchain platform vendors continues to swell as new entrants join the market. Many of these growing pains can be attributed to CIOs and other executives trying to get their hands around the new, emerging technologies. Adrian Lee, senior research director at Gartner, stated, “Many CIOs overestimate the capabilities and short-term benefits of blockchain as a technology to help them achieve their business goals, thus creating unrealistic expectations when assessing offerings from blockchain platform vendors and service providers.” Gartner expects digital assets to add huge value to businesses over the following decade, stating that the overall business value-added will grow to more than $176 billion by 2025, and then exceed $3.1 trillion by 2030.

As time goes on, this complexity will be overcome and then fully mastered. David E. Rutter, president of digital assets firm R3 which maintains the Corda enterprise framework agrees, stating that the blockchain industry is maturing at an astonishing rate compared to other emergent technologies. The value proposition of blockchain over traditional centralized databases will become clear as systems become easier to use and implement. Much of the work to date has been primarily theoretical, and now that we are exiting these learning phases and moving into implementation, a learning curve was to be expected. A prime example of this maturation shows in Coca-Cola’s partnership with SAP, in which it expects to expand its use of blockchain from 2 to 70 of its manufacturers in 2020. The Coca-Cola company noted its previous inefficiencies and implemented a blockchain solution to help fill orders, and expects to reduce its reconciliation and order turnaround from weeks to mere days. The biggest efficiency gains proved to be working with its partners, due to having to pass through intermediaries; now, they intend to move forward to implementing such processes with retail giants such as Wal-Mart and Target.

The Growth of Blockchain as a Service (BaaS)

Similar to other -aaS platform types such as SaaS (software as a service), blockchain is poised to grow further in the current enterprise market as a platform. Two of the most well-known systems are IBM’s Hyperledger Fabric and R3’s Corda; however, other heavy hitters like Microsoft look to be joining the fray. Microsoft announced in December 2019 that they are adding Azure Blockchain Tokens to their Azure platform, which will allow end-users to create and manage tokens for physical or digital assets. Furthermore, they announced the implementation of a blockchain data manager that allowed users to capture blockchain ledger data, transform and decrypt it if necessary, and deliver that data to other sources, which will simplify the tasks of integrating blockchain ledger data into other already-existing applications.

Amazon’s Managed Blockchain also entered general availability earlier in 2019, with the intent of allowing companies to integrate with Amazon Web Services and create blockchain networks that are scalable and easy to manage. AMB is described as a turnkey solution, which allows them to choose a blockchain framework, add network members, configure member nodes that process transaction requests. The system then will handle the rest of the setup, and automatically create a network that can cross over between different AWS instances and configure its software, security, and network settings in the process.

Azure and AWS are two titans of cloud computing that have just implemented blockchain and digital assets capabilities this year. While other companies may have worked internally to develop their own fabrics and business processes, these represent a swelling of options of pre-made blockchain systems available to the public at large.

Conclusion

Digital assets have seen a great leap in both securing the interest of institutions as well as making major inroads into business processes, both as an integrated component and as a brand new offering from both Microsoft and Amazon. The gains from the examined cases have shown adoption many times over even the previous year’s – and it is clear that it is going to be an exciting year, let alone decade.

If you have questions about our fund or would like to be sent investor documents, you can contact our investor relations department at contact@varys.capital.

Regards,

Darius & Saul
Managing Partners

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