The Institutions Are Already In Crypto: Why Web3 Natives Are In The Driver's Seat

By Jupiter Zheng

For many years, observers have wondered when the behemoths of traditional finance, like BlackRock and JPMorgan, would finally enter the blockchain arena in a big way. The expectation that these bellwethers of global finance would, in a sense, “see the light” by acknowledging the technological advantages of web3 was perhaps a little naive. But it was not unfounded: traditional investors have been making incremental shifts in this direction for some time, whether by investing in spot cryptocurrency, launching custody services, settling digital bonds on public ledgers, or creating their own product offerings for retail and institutional clients.

The argument that blockchain and cryptocurrencies must be embraced by traditional powerhouses in order to flourish is a sound one. But the heavy focus on legacy financial institutions overlooks something important: the rise of crypto-native institutions. Rather than having to be convinced of the merits of distributed ledgers, these forward-looking innovators and investors grew up with decentralized tech at the heart of their operations and vision. And make no mistake, they will be the ones to drive the industry – and maybe finance as a whole – forward.

We Were Always Here: The Vitality of Crypto-Native Institutions

As the crypto industry has matured, a new breed of institution has emerged. These are not your traditional Wall Street firms belatedly flirting with blockchain tech; they are entities that fundamentally understand and appreciate the ethos of decentralization. They get the tech, and the reasons for its development, at an instinctive level. They have been an integral part of Web3 since the technology’s inception, and have evolved together with it. From the beginning, these institutions have been key drivers in the industry’s advancement through major milestones, from the rise of DeFi (short for “decentralized finance”) to Ethereum’s ETH/USD migration to proof-of-stake to the recent approval of multiple spot Bitcoin BTC/USD exchange-traded funds (ETFs).

The latter event has been heralded as a watershed moment for crypto, enabling regular investors to gain exposure to BTC price movements without physically holding the asset. And the entry into the space of the likes of BlackRock and Grayscale owes much to the painstaking efforts of those already operating in crypto, who toiled to communicate, and demonstrate, the value and necessity of such financial products over many years.

A swathe of these innovators came to prominence during the so-called DeFi Summer of 2020, when a variety of financial services came on-chain and showed the value of eliminating middlemen. At the start of that heady summer, a mere $1 billion was locked in such protocols. That figure hit an all-time high of around $175bn before falling back to earth. It’s no surprise that many critics focus on the retrenchment while missing the crucial fact that total DeFi investment, which now stands at just shy of $60bn, has grown by 6,000% in under four years.

The tectonic shift that motivated traditional financial institutions to investigate or even embrace blockchain tech is a credit to the ingenuity and passion of crypto-natives who created valuable infrastructure and high-utility decentralized apps (dApps), whether they were concerned with NFTs, staking, swapping, gaming, stablecoins, governance or something else. These protocols, which have continued to launch at an impressive clip since 2020, collectively showed established institutions where the future lies.

Of course, it wasn’t just decentralized entities that created the groundswell of positivity that compelled incumbents to dip a toe into web3 waters. The dominant centralized crypto exchanges – notwithstanding high-profile collapses like that of FTX – played their part too. Coinbase in particular turned heads when it became one of the first crypto-native companies to go public in 2021. 

Credit, too, is owed to the VCs, LPs and angel investors dedicated to bootstrapping promising web3 projects. Not to mention the organizers of events and hackathons that shone a spotlight on the problems talented crypto devs were solving.

How Web3 Players are Leading the Way

Naturally, acknowledging these prime movers should not downplay the importance of old-school institutions like Fidelity and Standard Chartered in the grander scheme of things. Many of these entities manage the mighty levers of our economy, and the sheer scale of capital under their control means their participation will be a game-changer for the industry, and will exert a multiplier effect in terms of liquidity and mainstream blockchain acceptance.

Moreover, traditional financial institutions have an important role to play in the development and adoption of DeFi networks. Indeed, effective collaboration between incumbent and crypto-native players deserves much of the credit for Web3’s increasing mainstream acceptance. Still, the institutions that have grown up with blockchain are in the driver’s seat. They are the ones shaping the landscape, accelerating innovation, and setting the standards for how blockchain should be integrated into the global economy. Their leadership and vision are crucial in ensuring the continued growth of the crypto space remains healthy, sustainable, and in line with the core principles of decentralization.

One of the main advantages of having crypto-native institutions set the course is their ability to steer the industry away from replicating the inefficiencies of traditional finance. Crypto-native institutions are founded on ideals of transparency, fairness and accessibility – ideals that are often at odds with the modus operandi of big banks. 

Traditional finance’s embrace of crypto will bring with much-welcomed legitimacy, liquidity and resilience. But the future of decentralized tech will be, and is being, laid out by crypto-native institutions that have propelled the industry forward since the beginning. As we move deeper into 2024 and beyond, they are at the forefront of the emerging, decentralized financial world.

Jupiter Zheng is a Partner, liquid fund and research at HashKey Capital, a digital asset and blockchain leader helping institutions, founders and talents advance the blockchain industries.