Regulation is key to wider adoption of digital assets

Institutional investors have a growing interest in bitcoin and other digital assets, but a major stumbling block to widespread adoption is uncertainty around regulation, according to exchange leaders and crypto experts at FIA's International Futures Industry Conference on 17 March.

"The overall view of digital currency is becoming more mainstream," said Adena Friedman, president and CEO of Nasdaq. "Increased involvement from institutional clients and large corporates, particularly related to payments, in addition to retail investors is showing that the asset class is starting to mature."

However, Friedman warned, "Regulation needs to catch up to create fair markets for everyone. The manipulation in the markets remains a major risk. People are afraid of regulation, but in this case, regulation will make more people have confidence in the markets and more institutional investors will engage in the markets."

In the US, progress in regulating digital assets has historically been slow. The Securities and Exchange Commission, for instance, has not adopted rules specifically tailored to cryptocurrencies and how they should be treated by companies, which some argue has created an unclear rulebook.

The results of a recent FIA industry survey, which asked respondents for their views on digital assets, largely supports those comments. Nearly a third of respondents said their firms are already participating in markets for bitcoin and other digital assets, and another 10% said their firms are likely to enter by the end of this year. Exchanges, independent brokers and technology vendors were the most engaged with this asset class, while banks and asset managers tended to be "watching with interest" from the sidelines. About 40% of respondents said uncertainty around regulation was the main obstacle to greater involvement.

"Digital assets have certainly become more institutionalized but it is not yet a part of the US or Western banking system," said Jeff Sprecher, chairman and CEO of Intercontinental Exchange, which owns crypto futures trading exchange Bakkt. "Bank regulators have not really allowed regulated bank-type entities to participate in those markets."

Continuing the theme of investors' growing embrace of digital assets, a panel moderated by J. Christopher Giancarlo, former chairman of the Commodity Futures Trading Commission, looked at the path to maturity for this new asset class and the hurdles that remain in the way of its widespread adoption.

The panelists noted that the launch of transparent, regulated, exchange-traded crypto derivatives – for instance, CME bitcoin futures in 2017, bitcoin options in 2020 and ether futures last month – has spurred institutional interest in the digital assets marketplace.

"The launch of bitcoin futures really broadened the ability for a new set of institutional participants to enter the crypto markets," said Colleen Sullivan, co-founder and CEO of Chicago-based CMT Digital Holdings, a division of proprietary trading and alternative asset management firm CMT Group.

"The CFTC self-certification framework [introduced in 2017 for digital currency futures products] provides clear evidence of how encouraging market-driven innovation and providing regulatory clarity paves the way for traditional financial market participants to engage in crypto with confidence, knowing that they're compliant with regulatory obligations," Sullivan said.

Progress

While regulation uncertainty is clearly perceived as a major headwind for crypto, some progress has been made in recent months in the US in bringing cryptocurrencies out of the shadows,  the panelists said.

In January, the Office of the Comptroller of the Currency clarified that national banks may use cryptocurrency stablecoins for payments and participate in independent blockchain node verification networks. This has the potential for banks to start actively participating in cryptocurrency projects that many thought were outside the scope of permissible banking activity. It also creates the opportunity for banks to partner with cryptocurrency fintech companies on joint ventures that could be lucrative to both.

A month prior to this, the SEC asked for public comment on broker-dealer custody of digital assets and how broker-dealers should be regulated when holding these products and recommending them to investors.

"We've seen progress over the past few months, certainly in the US, with the OCC clarifying the role that banks can play in this ecosystem, as well as recent requests for comments from the SEC and now a regime change at both the SEC and CFTC," said Tom Jessop, president of Fidelity Digital Assets. "Most market observers would see these developments as being positive for the digital assets space."