Crypto Readies for Institutional Money as Dark Winter Bites
As the crypto winter shows little signs of receding, infrastructure and trading platforms are quietly being put in place that may help facilitate a flood of institutional capital moving into the space in 2019. Financial markets participants see huge opportunities in crypto and are awaiting the green light from global regulators.
As things currently stand, a lack of clarity over what the regulations governing cryptocurrencies will be is a barrier to increased institutional investment in crypto. The US’s Securities and Exchange Commission (SEC) has yet to decide on how cryptocurrencies should be regulated. Hopes of the launch of a crypto-based Exchange Traded Fund (ETF) were repeatedly dashed in 2018 with rebuttals from the SEC blamed for sharp falls in cryptocurrency prices. The SEC plans to decide by February 2019 whether to approve a proposed Exchange Traded Fund (ETF) from SolidX Partners, a financial technology company, and Van Eck Associates, an asset manager.
In early 2018, a member of Germany’s Bundesbank said that any attempt to regulate cryptocurrency must be made on a global level to be effective. In the meantime, investors in cryptocurrencies face an absence of regulation and uncertainty over what the rules governing digital assets will look like. New York was the first state to propose regulation of bitcoin in July 2014. New York state released a comprehensive framework for regulating cryptocurrency firms. Measures included anti-money laundering compliance and cyber security rules, along with requirements for firms operating in the space to obtain a licence.
A City lawyer at Freshfields Bruckhaus Deringer in London told Moondock at TechCrunch Disrupt Berlin that there was a general consensus among regulators that blockchain technology is good while crypto is bad. A negative perception of the asset class among senior regulators stems from fears over consumer protection after the recent speculative bubble and sharp price falls this year.
The launch in January 2019 of Bakkt, the cryptocurrency payment and trading platform of the Intercontinental Exchange (ICE), a global operator of 11 securities exchanges and clearinghouses, is expected to be a major milestone in institutional adoption of crypto. The US’s Commodity Futures Trading Commission (CFTC) is currently reviewing, the Bakkt Bitcoin Daily Futures contract and the Bakkt Warehouse. “These products represent a critical shift in the evolution of crypto markets toward more accessible, useful, and regulated instruments,” wrote Kelly Loeffler, the CEO of Bakkt, in a Medium post.
Bakkt’s entry into crypto markets follows the Chicago Mercantile Exchange (CME), the world’s biggest derivatives exchange, and Chicago Board of Trade (CBOT), the world’s largest options market. The Chicago-based exchanges launched Bitcoin futures products towards the end of 2017, coinciding with the beginning of the current crypto winter. Nasdaq, the technology-laden exchange, also has plans to launch its own Bitcoin futures products in the first quarter of 2019.
Coinbase has stated that its mission is to make crypto accessible to institutional investors via its specialist custody services. Coinbase Custody is described by the cryptocurrency exchange as a “battle-tested cold storage for crypto assets, an institutional-grade broker-dealer and its reporting services, and a comprehensive client coverage program”. Meanwhile, Fidelity, a major global investment manager, has this year unveiled a cryptocurrency custody and trade execution for institutional investors.
Frequent security breaches at cryptocurrency exchanges makes the asset class beyond the risk profile of many institutional investors. Given the high volume of transactions made by investment funds, credit risk is a major issue. An investment fund could have a huge market position held at an exchange in Bitcoin that is vulnerable to a hacking attack in which the Bitcoins are stolen. Effective custody solutions, which provide assurance that crypto assets are held securely, are therefore vital for the sector to attract greater interest from institutional investors.
The history of cryptocurrency trading is littered with hacking attacks and high-profile security breaches at major exchanges. Notably, Mt. Gox imploded after losing almost $400 million of its customers’ digital currency in February 2014 as a result of a hacking attack. Credit risk issues make it unsafe for institutional investors to transact via major cryptocurrency exchanges. Complying with Know Your Customer (KYC) and anti-money laundering (AML) regulations also presents significant challenges. Complying with stringent KYC and AML procedures is mandatory in capital markets while the nascent crypto space is still facing up to delivering effective solutions. While fintech startups are developing solutions in this space, the nascent nature of the technology makes it a challenge for institutional investors to comply with the sort of rigorous counterparty checks that are required in capital markets.
Whether a flood of institutional capital into crypto assets will result in rebound in cryptocurrency prices remains to be seen. Even a small allocation of assets into crypto from institutional investors, hedge funds and pension funds could result in substantial increases in the market capitalization of cryptocurrencies, which currently stands at $108 billion, according to data from CoinMarketCap. Time will tell whether 2019 is the year when crypto enters the financial mainstream. Nevertheless, there is undoubtedly huge pent up interest in the sector among capital markets participants.
Moondock aims for more transparency and accountability when it comes to the funding of blockchain projects. To that end, the development of improved infrastructure and technology in the crypto ecosystem is to be welcomed, as is a greater presence from institutional investors. As for the broader mission and market solution of Moondock please check out or information on Medium https://medium.com/moondockhq/about and check or other social channels for frequent content from within the space.
