There have been few true constants in the evolution of cryptocurrencies over the last five years, but speculation around the arrival of institutions and institutional investors has been one of the most consistently heralded themes.
For years, “Wall Street is coming” to crypto has been prematurely declared, much to the dismay of less excitable researchers, journalists, and industry observers.
But as bitcoin continues marching further into its second decade of existence, and as we see more evidence of convergence between the crypto ecosystem and traditional finance, institutions have steadily moved from simply talking about crypto to taking action.
Recent research by Bitwise Asset Management found that the number of U.S. financial advisors allocating to crypto is expected to double in 2020 to 13%. While that might not sound like a lot, the advisors surveyed help manage roughly half the wealth in the United States.
Further, 65% of these advisors expect the price of bitcoin to appreciate over the next five years (up from 55% last year). This is notable given the United States is the dominant home to institutional capital and trends in the US often serve as an early indicator of how global capital is deployed.
Other recent data support the view that institutional interest and ownership is growing. For example, in May of last year Fidelity stated that 47% of institutional investors believe digital assets have a place in their portfolio, and 22% already own digital assets. Recently, a State Street survey showed that approximately 38% of their institutional clients plan to increase their exposure in 2020 to digital assets.
As institutions begin to offer insight into their cryptocurrency strategies, and market dynamics outside of their control are defined, the catalysts for their interest in crypto are crystalizing.
Past, meet Future
Over the last few years, institutions and global brands have slowly migrated toward becoming less secretive with their cryptocurrency plans.
Take for instance J.P. Morgan creating its own digital coin for payments between institutional clients, Fidelity launching a digital assets division, and the Libra project that counts dominant firms like Facebook and Uber among its founding members.
Not only have these initiatives offered insight into what these firms consider most strategically important to their success in the world of decentralized finance, but also have implicitly validated that the technology underpinning cryptocurrencies is vital enough to future success to warrant strategic investment.
At the same time, there’s never been more speculation around cryptocurrency unicorns using the public equity markets of traditional finance to IPO and fuel the next chapters in their growth. Such IPOs may take place ahead of another oft heralded future catalyst — an SEC approved Bitcoin ETF — and would give Wall Street and institutional capital even more reasons to support (and ways to invest in) expanding cryptoasset ownership.
As traditional finance and the cryptoasset ecosystem inch ever closer to what we believe is an inevitable convergence, the distrust and skepticism that has previously existed around any institutional discussion of cryptoassets is increasingly being replaced with not just comfort, but genuine enthusiasm.
A diminishing need for regulatory crystal ball gazing
Ask any institution what’s held them back from investing in the cryptocurrency sector, and one of the top reasons will undoubtedly be the lack of clarity from regulators. In defense of regulators, the questions posed by cryptocurrencies are dramatically different from other innovative technologies. It was never realistic to expect immediate, perfect clarity from authorities on such a disruptive technology.
Indeed, given the complexity of blockchain technology, and the concerns around the inherent challenge posed by this technology to how financial markets currently operate, the space created for crypto innovation to flourish mark regulators as one of the leading unsung heroes in the story of cryptocurrency’s rise over the last decade.
Today, after years of exploring and educating themselves on the crypto ecosystem, regulators are providing more decisive and comprehensive frameworks to oversee and guide both crypto companies and traditional financial institutions.
We are also now seeing refinement and further clarification around longer-standing regulatory frameworks, such as the New York BitLicense, which can open the door for institutions in the world’s leading financial hub to invest in crypto for the first time. Both the cost and time needed to obtain the license have steadily decreased, and now over 20 firms have been granted a virtual currency charter or license in New York.
By revisiting their early approach to regulating cryptocurrencies and digital assets, New York has also set a helpful example for other regulators across the world in countries like India and South Korea, which have been relatively more restrictive in their early efforts to regulate crypto.
Now, there is still plenty to resolve around regulation of the cryptoasset industry. And continued rapid evolution of blockchain technology makes the job of the regulator all the more difficult. But regulators are motivated to act and more equipped than ever with better data, tools, and research to make prudent decisions that promote rule clarity and responsible innovation.
As these regulations continue to go from ideation to codification, expect institutions to embrace the greater certainty and expand both their cryptocurrency investments and projects.
Capturing a share of history’s greatest generational wealth transfer
Cryptocurrencies have already become a key strategic component of many institution’s strategies to prepare for and claim market share in what will be the largest generational wealth transfer in history. Research and consulting firm Cerulli Associates estimates that as much as $68 trillion will transfer from Baby Boomers to younger generations over the next 25 years.
This work has taken many forms, most often focusing on creating “digital banks” with friendlier brands and mobile-first experiences, which keeps the next generation of investors easily connected (“banking everywhere”) as they discover their own relationships with institutions they learned to distrust following the 2008 Global Financial Crisis. A parallel development is that young people have more willingly embraced cryptocurrencies as investable assets than their predecessors — especially among the Millennial demographic.
Just last autumn, CoinShares, Blockchain.com, and MKS (Switzerland) launched DGLD, a token that represents allocated physical gold stored in Swiss vaults. Purchasers of DGLD benefit from the digital ease of use, security and transparency of cryptocurrencies, combined with the enduring value of physical gold. Tokenized gold use has grown significantly and we can expect to see many more traditional assets tokenized.
A 2018 survey by YouGov found that over 50% of American Millennials were interested in crypto, and were three times more likely than Generation X to invest in crypto according to a survey by Bankrate. There’s less data available on Generation Z, which will follow Millennials as the next wave of investors to join the market, but early signs indicate a similar affinity for digital assets.
Only time will tell if existing institutions are able to weave cryptocurrencies into their offerings in a way that will appeal to these younger generations, which will soon hold the purse strings for the vast majority of wealth, or whether new challengers will continue to dominate crypto.
Regardless of whether it is an incumbent or startup that ultimately wins, it’s clear that crypto will play a central role in the evolution of wealth management.
It’s impossible to predict with perfect certainty what will happen in the next decade of cryptocurrencies as the crypto ecosystem and technology are still rapidly evolving.
But something crucial happened in the last two years: It is now widely accepted that cryptocurrencies are not going away.
As institutions learn more about the growing appetite amongst their clients for crypto, receive necessary regulatory clarity, and increasingly cater to a younger generation that has bought into the promise of cryptocurrencies, the choice has become very simple: Either embrace crypto or become irrelevant.
XRP Lawsuit: On Ex-SEC Chair Jay Clayton’s Sudden U-Turn After Suing Ripple
Ripple’s Boss, Brad Garlinghouse, on Monday, left a few remarks via his Twitter handle on a Wall Street Journal’s post co-written by former US-SEC, chairperson, Jay Clayton.
The post which was co-written by Brent MacIntosh, the former Undersecretary of the US Treasuries for International Affairs, sought to preach the all-to-familiar stance of most crypto companies: ‘Crypto needs regulation, but it doesn’t need new rules.’
Garlinghouse spelled out surprise over Clayton’s turncoat comments that the US government has no concrete and adequate regulatory framework for the crypto industry. He further added:
“Cryptos, like nearly any new innovative technology, can be used for good or bad purposes. The problem is that US companies seeking to be compliant and use this tech for good are left in limbo (or for Ripple, worse!) because of a lack of a clear, predictable framework.”
Jay Clayton, in his last days at the SEC, pulled a shocking stunt on the crypto community, suing Ripple for what it believes is the undocumented sales of large-scale XRP digital assets to unidentified customers.
The bane of the case which was first announced in December last year is in determining if XRP – the digital currency of Ripple – is an investment contract or just another type of asset existing in digital forms. Assets bought and sold do not lie under the jurisdiction of the SEC, but investment contracts (also known as securities) are well within their powers to investigate, using the Howley test as a yardstick.
When compared to Bitcoin and ETH…
XRP, unlike fully decentralized Bitcoin, takes the shape of a centralized digital currency. This is because Bitcoin is still being mined by different people across the world, but Ripple pre-mined billions of XRP coins.
How The Case is turning out
The latest in the seven-month-old lawsuit is a winning streak for Ripple. Judge Sarah Netburn denied the SEC’s plea to examine all records of Ripple’s conversation with lawyers and expert advisers to determine if it knew what class of asset XRP is, and what violations of the SEC’s laws it may have knowingly violated. This signified a sigh of relief for the company which has called the lawsuit a hindrance to its growth and plans to go public.
Clayton further expressed that the foundational frameworks of the US laws suffice to build upon for crypto regulations, but the government has to be careful not to commit under-regulation or over-regulation.
Ethereum Co-Founder Anthony Di Iorio Bets Big on the Future of Cardano and Polkadot
Anthony Di Iorio, a Canadian entrepreneur and the co-founder of leading smart contract platform Ethereum, said that he believes in the potential of Cardano (ADA) and Polkadot (DOT).
In an interview with crypto proponent Anthony Pompliano, Di Iorio, who is also the CEO and founder of Canadian blockchain startup Decentral and crypto wallet Jaxx, revealed that he has a diversified investment portfolio featuring several top projects, including Cardano and Polkadot.
A Big Fan of Cardano and Polkadot
“Now I’ve kind of fallen back to just simplicity. I’m in a number of different projects, but the majority of my stuff is in the top projects. I’m a big fan of Polkadot, I’m a big fan of Cardano.”
Di Iorio went on to narrate why he was so sure of the future of these two projects. He had joined the Ethereum development team earlier in 2012 when he met Vitalik Buterin at a Bitcoin conference.
He has formed strong relationships with other co-founders of Ethereum, including Vitalik Buterin, Cardano’s founder Charles Hoskinson, and Polkadot’s current CEO Gavin Wood.
Di Iorio admitted that while he worked with these men, he knew that they were goal-oriented and would help push these projects further.
“Big fan of Charles, let’s say that. You know, taking some different approaches in the way that they’re doing things, much more on the academic side of what he’s done and bringing stuff forward. Real big fan of Gavin Wood… Knowing those guys from the days back at Ethereum – and knowing their drive and knowing their competitiveness and their smarts – I was able to see those projects for the last few years and know that they were gonna get to where they’ve gotten up to.”
Not Getting Lost in DeFi
Despite all the recent hype about DeFi, Di lorio pointed out that he is keeping his investments simple and investing in larger projects.
“Most of my stuff is in the top few things, Ether, Bitcoin, Cardano, Polkadot. I like Cosmos as well. And there’s a few others, but I’m not getting lost in all the DeFi stuff. I just think there’s not enough time, not enough energy. It’s a full-time gig to be running a lot of that stuff and keeping on top of stuff, so I’ve simplified my life quite a bit over the past few years.”
Featured image courtesy of Business Insider
What you should know if your bank is exposed to Bitcoin
On one hand, El Salvador recently became the first nation to officially declare Bitcoin as its legal tender, and on the other, several nations have recently opined that their indigenous banks face a ‘threat’ from the world’s largest crypto-asset. Nevertheless, the rise in the adoption of cryptocurrencies has been accompanied by regulators taking the fast-growing market seriously.
Banks will now face “the toughest” capital requirements for their holdings in Bitcoin and other crypto-assets under global regulators’ plans to brush off the insecurity offered by the “volatile” crypto-market.
Using money laundering, reputational challenges, and massive price swings as the base of their proposal, the Basel Committee on Banking and Supervision is in the news after it explicitly stated that the banking industry faced “increased risks” and “financial stability concerns” from crypto-assets.
Accordingly, they have now placed Bitcoin in the “highest risk” category. The aforementioned committee comprises a host of nations and global institutions as its members.
The Basel Committee isn’t alone, however, with a Bank of International Settlements exec recently commenting that El Salvador’s Bitcoin policy is an “interesting experiment.”
*BITCOIN PUT IN HIGHEST RISK CATEGORY IN BANK CAPITAL PROPOSAL
— *Walter Bloomberg (@DeItaone) June 10, 2021
What’s more, the panel proposed a 1250% risk weight be applied to a bank’s exposure to Bitcoin and certain other cryptocurrencies. Bloomberg’s estimates highlighted,
“In practice that means a bank may need to hold a dollar in capital for each dollar worth of Bitcoin, based on an 8% minimum capital requirement.”
However, stablecoins and other tokens tied to real-world assets are set for lower capital requirements. The report further highlighted,
“The capital will be sufficient to absorb a full write-off of the crypto asset exposures without exposing depositors and other senior creditors of the banks to a loss.”
The proposal did not specify any specific timeline, and hence, the implementation of these rules can take a couple of years. The proposal is, however, open to public comment before it comes into effect. It should also be noted that the committee said that the initial policies were “likely to change” several times as the market “evolves.”
Even though banks like HSBC have been cautious about stepping into crypto-trading, a few big names, like Standard Chartered Plc have announced their entry into the space.
As for Bitcoin, it fell by over 3.7% in the last 24 hours to trade at $35,418 at press time.
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