The UAE is positioning itself as a significant player in the global digital assets market, trends suggest.
The global market for tokenised assets is projected to grow from approximately $0.4 trillion in 2023 to $10.9 trillion by 2030, as per the Economist Research Report. Additionally, the global market capitalization of crypto assets reached $2 trillion by the end of 2021, with expectations for a fivefold increase before the end of the decade. “Given the UAE’s regulatory advancements and active market participation, the country is likely to capture a significant share of this growing market,” Rifad Mahasneh, general manager for Mena at OKX, a leading crypto exchange and Web3 technology company, told Khaleej Times.
OKX on Wednesday released a research brief authored by Economist Impact, entitled “Digital assets as the new alternative for institutional investors: market dynamics, opportunities and challenges,” which highlights that institutional investors now view digital assets as an inevitable institutional opportunity, and a promising asset class that is set to grow substantially.
According to the brief, there are four crucial focus areas for institutions considering entry into the digital asset market: asset allocation, custody, regulation and risk management. Liquidity, market integration and compliance are also highlighted as important factors for market entry.
The focus areas and insights that emerged in the research brief were gathered from an Economist Impact roundtable discussion in Dubai in April 2024 featuring senior business leaders in digital assets and finance, as well as desk research and interviews of representatives of leading financial services and investment firms, including Citi, Al Mal Capital, Skybridge Capital, VanEck and others.
Mainstream and institutional investors in the UAE are increasingly integrating digital assets into their portfolios. This trend is driven by the recognition of digital assets as a promising and expanding asset class. “As per the report, there are around 40% of financial market participants, including banks, wealth managers, and exchanges, already using some form of distributed ledger technology or digital assets,” Mahasneh said.
Institutional investors are particularly drawn to the diversification benefits of digital assets, given their low correlation with traditional asset classes like equities and fixed income. “Some Institutional investors are allocating between 1% to 5% of their portfolios to digital assets according to the Economist Research Report, depending on their risk appetite. As the market matures and digital assets become more integrated into traditional finance, we could see a growing trend and this allocation increasing. By 2027, it is anticipated that digital assets could constitute around 7.2% of institutional portfolios,” Mahasneh said.
Overall, there is “growing consensus” among institutional investors that digital assets, such as cryptocurrencies, NFTs and tokenized private funds, have an important place in portfolio asset allocations.
Institutional investors plan to ramp up portfolio allocations to crypto through a number of investment strategies, with approximately 51% of investors considering spot crypto allocations, 33% considering staking of digital assets and 32% considering crypto derivatives
A total of 69% of institutional investors anticipated increasing their allocations to digital assets and/or related products in the next two to three years. The “rise of institutional-grade custodians” is ongoing and effective risk mitigation through custody is resulting in “new opportunities” for investors to access the digital asset markets, the report showed.
The institutional digital asset custody market is experiencing rapid growth, and is projected to have a compound annual growth rate of over 23% through 2028, the report showed.
Risk management is a crucial step for digital assets to become allocated into institutional portfolios. “Exchanges, custodians and custody insurers should prioritize robust infrastructure and security measures. The adoption of new technologies, such as proof-of-reserves, as well as independent third-party audits can increase digital asset adoption among institutions,” the report said.
Comprehensive risk management strategies utilized in the traditional financial sector, including value-at-risk models, scenario analysis and stress testing, and reverse stress testing should be adapted and used to safeguard institutional investments in cryptocurrency and digital assets, the report said.
OKX chief commercial officer Lennix Lai said: “This initiative to engage with the world’s leading institutional investors demonstrates how digital assets are rapidly being adopted in investment portfolios. This trend will only intensify if we see advancements in blockchain technology, enhanced regulatory clarity and uptake of innovative digital solutions like tokenized real world assets. Our collaboration with Economist Impact demonstrates OKX’s commitment to fostering a deeper understanding and adoption of digital assets among institutional investors worldwide.”
John Ferguson, Economist Impact’s head of globalisation, trade and finance practice said: “As digital assets gain prominence in financial markets, regulatory standardisation as well as sophisticated custody and risk management solutions tailored to digital assets are crucial considerations for institutional investors. This research brief, sponsored by OKX and developed by Economist Impact, aims to equip institutional investors with insights into recent trends, ongoing challenges and emerging opportunities around digital assets as they navigate this fast-evolving ecosystem. The findings also highlight the powerful role that technology-driven solutions can play in embedding trust in digital assets among these investors.”
The outlook for digital assets in the UAE is positive and characterized by growth and increasing institutional adoption, Mahasneh said. “Digital assets are set to become a staple in institutional portfolios due to the maturing blockchain technology, advancements in digital security infrastructure, and ongoing efforts to achieve regulatory clarity. The UAE, being a forerunner in establishing a dedicated virtual asset regulatory authority, is well-positioned to capitalize on these developments. The increasing adoption of digital assets is expected to continue, driven by regulatory support and the expanding availability of investment vehicles such as ETFs, crypto derivatives, and tokenized real-world assets,” he added.