Forecast: Investment In Financial Services Using Blockchain Poised For Growth in 2021

Experts say 2021 is poised to see greater adoption and venture capital investment in blockchain technology. That prediction comes as more financial services apps are built using blockchain technology and cryptocurrency has become more widely accepted.

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Also working in the industry’s favor is the fact that major financial services companies including PayPal, Visa and JPMorgan have adopted cryptocurrency as a payment method in the past year, as well as more startups coming on the scene—armed with capital—to develop more user-friendly blockchain platforms.

Still, blockchain faces hurdles, including volatility in cryptocurrency pricing and confusion and misunderstanding from many consumers about the technology and related financial services, experts say.

Blockchain is digital information that is stored in a public database, and the benefit, particularly in the financial sector, is the ability to have a shared ledger recording detailed transactions without any identifying information, leading to improved security.

Investment in this space is growing, particularly in Europe, which has been quicker to adopt enterprise blockchain that includes financial services, health care, energy, and food and agriculture, said David Chreng-Messembourg, co-founder and partner at LeadBlock Partners in London. LeadBlock is a venture capital fund investing in early-stage business-to-business blockchain startups.

“We expect a funding need of more than 350 million euros [about $425.5 million] in Europe in the next 12 to 18 months after speaking with more than 200 B2B blockchain startups for our Enterprise Blockchain 2020 report,” Chreng-Messembourg told Crunchbase News.

Investment

Within the financial services ecosystem, but outside of cryptocurrency, he sees interesting startups and good progress being made in the areas of:

• Tokenization, or the process of issuing a token on a blockchain which represents a real asset. This is a “highly active space with heavy VC investments,” said Chreng-Messembourg.
• Fund administration, an area that is under pressure to manage costs, and one where startups are using blockchain to take up the challenge; and
• Central Bank Digital Currencies (CBDC), a new form of central bank money issued on a blockchain, essentially central bank-backed digital currency.

“To date, no country has launched one, however, many central banks are running pilot programs,” Chreng-Messembourg said. “We see several advantages including lowering transaction costs, accelerating transfer times and promoting financial inclusion. A CBDC could become a game changer for most fintech blockchain solutions as it would facilitate onchain transactions.”

As adoption of blockchain gains momentum, so does venture capital investment in the technology. For example, Bloccelerate VC, a 2-year-old, Seattle-based early-stage VC firm, closed its first fund of $12 million in December to support blockchain technology startups in the trade finance, financial services and supply chain spaces, and has already invested in six companies.

Investors handed out $23.2 billion to global blockchain companies since 2016, and $3.3 billion to U.S. companies during that same period, according to Crunchbase data.

Although deal flow between 2019 and 2020 was relatively flat due to the global pandemic, Brooke Pollack, managing partner at Hutt Capital, expects it to increase in 2021. Hutt Capital is a blockchain venture capital fund of funds.

“We saw a pickup in deal activity in the fourth quarter, driven by a strong year for companies across the blockchain and crypto ecosystem,” Pollack said. “Strong performance drove increased attention from investors, and we see this continuing in 2021.”

Pollack also expects to see high-growth companies that raised seed and Series A rounds to raise larger rounds this year as they scale and attract more attention from venture investors.

Startups are coming out with tools and products under decentralized finance, or DeFi, which is financial software built on the blockchain that can be pieced together. Some examples are Bitpay, which provides bitcoin payment solutions for businesses and organizations, and BlockFi, a secured nonbank lender that offers crypto-asset-backed loans to crypto-asset owners. Bitpay has raised $72.5 million, while BlockFi has raised nearly $160 million, according to Crunchbase data.

As DeFi surpasses $19 billion in total value locked (total supply being used), the amount of capital being invested into startups building in the blockchain space is impossible to ignore, said Alon Goren, founding partner at Draper Goren Holm, via email. The firm is a fintech venture studio focused on incubating and accelerating early-stage blockchain startups.

Apps are needed because current DeFi interfaces are clunky, hard to use and not as friendly yet for the average consumer, said Goren.

“We’re really excited about the wave of entrepreneurs eager to make decentralized finance available for the masses,” he said. “2021 will introduce the birth of mass-adoption inspired consumer-facing apps that will allow more people to tap into high-yield-generating decentralized financial protocols. It must be simple, clean and to the point. All these additional features and navigational barriers are stifling adoption.”

Cryptocurrency adoption

With regard to cryptocurrency pricing volatility, after reaching an all-time high on Jan. 8 of approximately $41,500, Bitcoin crashed losing about 24 percent of its value as of Jan. 11. Ethereum, which reached a market cap of $120 billion in early January, also saw its price go down.

Further validating the industry is major financial services companies adopting them, such as PayPal, said Daniel Polotsky, crypto chief and CEO of CoinFlip, which touts itself as the largest crypto ATM company in the world.

“I’m biased, but I have been in this space since 2013, and the fundamentals of bitcoin and cryptocurrency are awesome, and for financial services companies to see that—with PayPal and Square buying up some—everyone will follow on,” Polotsky said in an interview. “Our hope is that eventually it will be used more for a payment method.”

There is still a lot of work ahead though, said Graham McConnell, co-founder of blockchain-based fintech startup Nth Round.

While big banks are using cryptocurrency for international transfers, it is still not a compelling way of payment that most people typically understand or are able to manage, he said.

McConnell predicts 2021 could mean a wider adoption of blockchain and cryptocurrency as payment methods.

“There is a definite possibility that this could be the year,” McConnell said. “Almost daily, we are seeing banks taking it seriously, so this might be the year where it reaches mainstream.”

However, he cautions that price volatility in the marketplace is still an issue. He pointed to 2017 and 2018 as years when people jumped on crypto, urging the price up, only for the market to crash.

“What worries me is because there is speculation and the result is volatility, people could get hurt by it,” he added. “If it looks like a bubble, then people are getting in for the wrong reasons.”

One of the entities helping with the education component is Real Vision, a broadcast media company, which launched a crypto site last November to provide content for traders, finance professionals, policymakers and educators who want to learn more about crypto markets.

Co-founder Raoul Pal told Crunchbase News that as long as cryptocurrency was still “the wild west right now, there are going to be a lot of failures.” He agrees that 2021 will be the year for institutional adoption of cryptocurrency, which was one of the drivers of the new crypto site.

“People don’t quite know what is going on,” Pal said. “They want trusted ownership and transfer of assets. There are big and meaningful companies in this space, like BlockFi, which is just doing interesting stuff.”

Meanwhile, regulatory clarity regarding cryptocurrency has improved in the past five years, said Michael Gronager, CEO of Chainalysis. The company provides blockchain data and analysis to government agencies, exchanges and financial institutions.

Regulations enable companies to do what they do, protect citizens, as well as drive change in sentiment that “crypto is dark and scary,” said Gronager in an interview.

“We anticipate more deregulation of financial services,” he said. “In the past, there was a need for regulations around what banks needed to report, but with a change in transparent reporting, it will enable financial deregulation that will enable more commerce to happen, which is the only way to compete against other countries, like China.”

Illustration: Dom Guzman