Digital assets are shifting from offshore markets to a more regulated onshore framework, an evolution that will redefine how they get integrated into the global financial system.
"The world of crypto and blockchain is overwhelmingly offshore," says Paul Brody, global blockchain leader at Ernst & Young, at the Chainlink SmartCon held recently in Hong Kong. According to EY’s data, 71% of crypto trades are happening offshore while the remaining 29% are onshore. In contrast, 99% of the world’s assets reside onshore.
The mismatch between where assets are owned and where crypto trades are taking place will diminish over time as the regulatory environment matures and stabilizes, prompting institutional investors to gravitate towards regulated entities within their jurisdictions, Brody predicts. Digital assets will follow this pattern as they gain mainstream acceptance.
“This means if you are a [sovereign wealth fund] operation in London and you want to buy digital assets, you are going to buy them from the regulated entity in the city of London. You are not going to buy them from somebody in the Caymans. What we are going to see here is the huge rush to take offshore things and put them back onshore,” he explains, noting that there will be a battle between offshore entities with digital asset capabilities trying to shift onshore against onshore entities trying to figure out the practices and products of offshore entities.
The transition will not only impact the trading dynamics of digital assets but also stimulate interest in decentralized finance (DeFi) as investors seek new opportunities in a changing economic climate. “DeFi is coming back after the crypto winter because the search for yield is coming back,” says Brody.
This is partly because interest rates are heading down. “Zero interest rates are not a temporary thing – they are going to be the permanent norm. Gradual improvements in wealth, asset accumulation, production and health are all building towards a post-scarcity world,” he asserts.
However, it will still take years for the digital asset market to become mainstream. Brody notes that it took the US public pension fund 40 years to shift from focusing on fixed income and cash investment to equity and alternatives. “If you want to drive transformation, you need an academic and intellectual underpinning to do that. Big industry transformations don’t happen overnight. Typically, it takes several decades at a roughly 20-25% of year-on-year growth,” he says, adding that the crypto and blockchain future is expected to develop at a similar pace.
Chainlink is a decentralized platform that provides data, computation, automation, and randomness services for smart contracts across different blockchains. This is the first time it held its flagship conference in Asia, upon the invitation of the Hong Kong government.
