Fresh Arrows in the Quiver: Decentralized Technology Takes Aim at Solving Legacy Issues

In triaging the road ahead for decentralized technology and digital assets, we ask: Which questions are sparking productive partnerships? Where is trust (or lack thereof) the limiting factor? Where could active investors start engaging with the next generation of infrastructure?

By Molly Hoffmeyer, Evan Thorpe, & Joe Darcy

Last week Blackrock launched its spot bitcoin private trust for U.S. clients, further widening the aperture through which market participants in emergent assets collide with institutional infrastructure. This highlights something that SixThirty Ventures knows firsthand through our work with our Strategic LPs — that interest among incumbent financial institutions in decentralized technology, despite price volatility, is maturing faster than ever.

This shift up the maturation curve implies that as decentralized technology becomes more proven, and more trusted, the willingness to partner should expand.

Much has been written about the opportunities presented by digital assets as an asset class — and we will write in the future on our views on this side of the opportunity space — at the moment we are particularly focused on the opportunities for decentralized technology to solve core problems that have for decades been plaguing financial institutions’ ability to function optimally while serving their clients.

To a degree, this is a bit of a “chicken or the egg” conundrum. Taking the asset servicing space as an example, institutions have been driving towards real-time trade processing for years through a combination of proprietary software, third-party technology, and outsourcing. Digital assets are inherently real-time due to the distributed nature of their decentralized offerings; however, are pure-play crypto solutions too “revolutionary”? What if the nut that the industry is trying to crack demands an approach that is more “evolutionary”?

As decentralized technology and the ecosystems around them mature, the question remains: Is the size, shape, and scope that partnerships may take more clear today than yesterday? Or has the explosion of players in this ecosystem muddied the waters?

Our observation; while technology has become easier, change has become harder. The proliferation of tech ecosystem players across traditional and decentralized finance would suggest that greater levels of domain expertise and keener focus of use-cases would lead to greater alignment among partners.

But these, by themselves, haven’t precipitated that alignment. So, what’s the limiting factor?

Set against the gordian knots presented by perennial industry quandaries, digital assets present the path of least resistance to re-configure market structure and impact real change on big, audacious goals for institutions, such as:

• How can digital asset infrastructure (APIs, trading, lending, borrowing, etc.) transform the back office to serve clients more efficiently, with less errors? How do legacy participants and new market entrants come together in this space? Is there room for each to thrive?
• How can financial institutions, who have faced challenges serving lower-income populations profitably, address issues with inclusion and underserved populations? Can digital assets help companies expand the populations they are able to serve, and provide new financial products to consumers most in-need?
• How does the customer experience evolve, as it grows more critical than ever that financial institutions and insurance companies offer digital products & take advantage of embedded finance?, How do institutions overcome legacy infrastructure & point solutions which make it difficult to do this in house, while engaging traditional IT providers necessitates multi-year, multi-million-dollar commitments? Can the opportunity for decentralized finance is to offer not only benefits to scale, enhancing both product availability & innovation, but also deliver in low-code/no-code solutions that will improve accessibility and stoke uptake?

These are big goals and achieving them involves a big lift in resources to break the institutional inertia that beleaguered in-house teams face. And these are not just problems for innovation at such institutions. Broadly, many companies struggle with human capital and sustainability. Technologies such as RPA, blockchain, & cognitive systems stand to reduce headcount by 60–70% and achieve cost savings of 30–40%, according to a recent report by Deloitte. These are big jumps and in-house teams ask: “would we be satisfied with more modest improvements, or could the leap-frogging potential of blockchain allow ambitious goals to be on the table, and free of the all-too-familiar legacy headwinds?

What sets SixThirty apart is our hands-on-clay method of both investing and investor management. Our Strategic LPs have shown an increasing appetite for digital assets and decentralized technology, as more of their customers have moved into the space. While some are just dipping a toe, others are taking more concentrated, active bets.

This is a burgeoning technology that has generated an industry, with both risk and opportunities abound. With a myriad of options out there where we could be focusing our attention (and that of our LPs), we have identified several areas that have piqued our interest and where we’re excited to partner with founders who have big, bold ideas:

• Fund Audit: Asset managers want to cut down on costs generated by continuous audit workflows and servicers are trying to think if there is a way to support this cost/labor problem. For example, end of year audit reconciliation is burdensome, especially if you are a medium-sized asset manager.
• Custody: With increased regulatory scrutiny as the digital assets space matures, so too has custody increasingly proven to be a difficult problem in crypto. The recent SOL drains got a lot of headlines on this, and we could see a rebound in interest in third party digital asset custody for retail (whether this constitutes a convalescence or a dead-cat-bounce in the space is another story).
• Market Data & Intelligence: As asset classes grow and expand to include digital assets, there will be a need for a new type of market data and intelligence to serve investors, traders, researchers, and back-office personnel. For example, new data sets are necessary for asset managers to properly monitor risk within portfolios.
• Investor Services & Communication: From custody to record keeping, decentralized finance has the opportunity to remake much of what happens “after the trade.” Building trust with all stakeholders will be critical to the success of any disruptor here.
• Compliance: Mid-market banks have seen increases in account openings with the growth in digital asset uptake in the past several years. How much could this market grow and how will these financial incumbent institutions ensure continued compliance?

And this viewpoint is not just our own. SixThirty works closely with incumbent leaders and startup founders within our ecosystem to understand their deepest pain points and forward-looking motivations for both investment and partnership. It is clear that digital assets represent a significant opportunity to transform financial services, insurance, health and privacy, and SixThirty is excited to partner with bold founders who have the vision and expertise to build solutions in digital assets and the decentralized technology that underpins them.