Crypto has always held the key to its future: transparency

Cryp­tocur­ren­cies have been grow­ing in pop­u­lar­i­ty as retail and insti­tu­tion­al investors increas­ing­ly turn to dig­i­tal assets seek­ing new sources of return and a hedge against infla­tion and oth­er wor­ri­some eco­nom­ic trends.

Through­out the Covid-19 pan­dem­ic, inter­est in cryp­tocur­ren­cies spiked, dri­ven high­er by a com­bi­na­tion of fac­tors, includ­ing their poten­tial as an alter­na­tive invest­ment to gold and the ris­ing pop­u­lar­i­ty among ama­teur investors. Cryp­tocur­ren­cies are poised to become a main­stream finan­cial asset class, bring­ing new ways to con­duct finan­cial trans­ac­tions and more trans­par­ent process­es.

Insti­tu­tion­al adop­tion of cryp­to assets has long been seen by many as a nec­es­sary step on the path to going main­stream. There is now evi­dence that this is begin­ning to take place, with momen­tum from tra­di­tion­al finan­cial insti­tu­tions ramp­ing up their expo­sure and pres­ence with­in the sec­tor in recent months.

Dig­i­tal asset invest­ment man­ag­er Coin­Shares report­ed that the first quar­ter of 2021 was a record-set­ting peri­od for cryp­to invest­ments, with $4.5bn (£3.19bn) in insti­tu­tion­al inflows dur­ing the peri­od.

At the same time, major banks have ramped up their infra­struc­ture to facil­i­tate increased expo­sure to cryp­to assets. In May, Gold­man Sachs revived its cryp­tocur­ren­cy trad­ing desk to meet the grow­ing demand from insti­tu­tion­al clients, while oth­er firms on both Wall Street and in the City of Lon­don respond­ed to the pop­u­lar­i­ty of the emer­gent asset class.
All this points towards the incre­men­tal, wider growth of cryp­tocur­ren­cies accord­ing to The Cryp­to Matu­ri­ty Mod­el, a frame­work for how tra­di­tion­al finan­cial insti­tu­tions can build cryp­tocur­ren­cy prod­ucts.

Pro­duced by Chainal­y­sis, a blockchain data plat­form known for its role in cyber inves­ti­ga­tions and com­pli­ance for gov­ern­ment agen­cies, finan­cial insti­tu­tions and cryp­tocur­ren­cy busi­ness­es, the roadmap out­lines how tra­di­tion­al finan­cial play­ers can embrace cryp­tocur­ren­cy prod­ucts while adher­ing to glob­al reg­u­la­to­ry mea­sures.

From train­ing staff in the nuances of cryp­to assets to estab­lish­ing cryp­tocur­ren­cy exchange-trad­ed funds (ETFs) and build­ing facil­i­ties to take cus­to­di­al own­er­ship of clients’ assets, the pace of adop­tion with­in pre­vi­ous­ly reluc­tant organ­i­sa­tions has accel­er­at­ed.
As tra­di­tion­al bank­ing takes lessons from cryp­to assets, the inverse is also true. With the greater incur­sion of main­stream bank­ing into the cryp­to mar­ket, this new asset class is adopt­ing prin­ci­ples from the estab­lished assets, with investors right­ly expect­ing a sim­i­lar degree of reg­u­la­to­ry account­abil­i­ty, trans­paren­cy and reli­a­bil­i­ty.

Trans­paren­cy and the advan­tages of blockchain tech­nolo­gies are key to the surg­ing growth of cryp­tocur­ren­cies, and an imper­a­tive dri­ver of its future. When applied to a sys­tem still root­ed in lega­cy, the pos­si­bil­i­ties are set to be boun­ti­ful.

“In the longer term, increas­ing num­bers of assets are like­ly to be digi­tised,” says Philip Grad­well, chief econ­o­mist at Chainal­y­sis.

“Already, sta­ble­coins such as USDC are digi­tis­ing dol­lars, and cryp­to exchanges are tokenis­ing stocks. If lega­cy banks do not get famil­iar with blockchain tech­nol­o­gy then they will lose busi­ness as assets move to new plat­forms,” he says.

It is no secret that investors are demand­ing access to cryp­tocur­ren­cies. On the retail side, the FCA esti­mates that 2.3 mil­lion adults hold cryp­to assets in the UK. Like­wise, insti­tu­tion­al­ly, hedge fund man­agers expect to hold 7% of assets in cryp­to with­in five years, research from fund admin­is­tra­tor Intertrust sug­gests.

But pair­ing the oppor­tu­ni­ties of the asset with for­ward-look­ing reg­u­la­tion is a hur­dle not yet tack­led by many gov­ern­ments.

Nev­er­the­less, a post-Brex­it reg­u­la­to­ry over­haul, as rec­om­mend­ed by the Kali­fa review of the UK’s fin­tech sec­tor, is on the hori­zon, pre­sent­ing leg­is­la­tors with an oppor­tu­ni­ty to cul­ti­vate an envi­ron­ment that sup­ports the prop­er use and reg­u­la­tion of cryp­tocur­ren­cies, and to turn the UK into a glob­al hub for the indus­try.

Such reg­u­la­tion that facil­i­tates the trans­par­ent use of cryp­tocur­ren­cies is set to be ben­e­fi­cial for investors, and already the FCA is wield­ing its pow­er to sup­port cryp­to-hold­ers, with pres­sure placed on the indus­try to step up efforts to meet anti-mon­ey-laun­der­ing stan­dards. Exist­ing reg­u­la­tion will only go so far in ensur­ing the longevi­ty of the asset, and if the asset is to fur­ther pro­lif­er­ate, more needs to be done.

In India, a nation whose offi­cial stance on cryp­to has been unclear for some time, bitcoin’s antic­i­pat­ed clas­si­fi­ca­tion as an asset class comes in par­al­lel with new reg­u­la­tions that seek to bol­ster the pos­i­tive effect of cryp­to assets on the nation’s econ­o­my.

Recent­ly, India’s impos­ing reg­u­la­tion on cryp­tocur­ren­cies may have sti­fled the oppor­tu­ni­ties for its cit­i­zens to cap­i­talise on the asset.

Chainal­y­sis research found that bit­coin invest­ment gains in India stood at $241m (£173m) in 2020, sig­nif­i­cant­ly below the expect­ed gain owing to the nation’s GDP and pop­u­la­tion.
“Right-sized reg­u­la­to­ry over­sight and super­vi­sion, that which ensures finan­cial integri­ty with­out com­pro­mis­ing the devel­op­ment and adop­tion of the ecosys­tem will encour­age eco­nom­ic growth and tech­no­log­i­cal advance­ment in tan­dem,” said Jesse Spiro, chief of gov­ern­ment affairs at Chainal­y­sis.

Mean­while, US finan­cial author­i­ties are tak­ing steps to have a more active role in mar­ket reg­u­la­tion. It is hoped that bet­ter fed­er­al over­sight will reduce risk expo­sure to investors.
Fun­da­men­tal­ly, cryp­to assets are primed to embrace the grow­ing need for account­abil­i­ty, both from a reg­u­la­to­ry stance, as well as from the prac­ti­cal appli­ca­tion of the main­stream­ing of the asset class.

Blockchain tech­nolo­gies have already instilled an unprece­dent­ed dis­course of trans­paren­cy with­in the finan­cial sec­tor, and that prin­ci­ple can­not be imped­ed on by reg­u­la­tion.

“Giv­en the trans­paren­cy cryp­to assets pro­vide, reg­u­la­tors should seek to apply addi­tion­al reg­u­la­tion around activ­i­ty, not the tech­nol­o­gy itself,” says Spiro.

Unlock­ing oppor­tu­ni­ty is fun­da­men­tal to cryp­tocur­ren­cies and the returns avail­able to investors, but fur­ther­ing the reach of the asset requires a broad spec­trum of indus­try sup­port.

From insti­tu­tion­al dol­lars pro­ject­ing cryp­tocur­ren­cies into the main­stream to reg­u­la­tion cement­ing its longevi­ty, the tran­si­tion of cryp­to is depen­dent on its fun­da­men­tal tenets — trans­paren­cy and account­abil­i­ty – and back­ing those ideas now will go some way in cre­at­ing more oppor­tu­ni­ties down the road.

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