According to Daniel Santos, a former Standard Chartered executive, one major catalyst that could reverse the current trend of the crypto market is the imposition of positive regulatory frameworks by leading digital asset economies.
Earlier this week, the world’s fourth largest asset manager Fidelity Investments introduced a cryptocurrency custodian solution.
The unforeseen decision of the firm to enter the cryptocurrency market provided two crucial hints regarding the mid-term growth of the market: there exists significant demand from institutions and regulators have acknowledged major digital assets as alternative stores of value.
As early as 2014, the cryptocurrency sector anticipated large institutional investors such as pensions, hedge funds, and endowments to allocate a small portion of their portfolios in the cryptocurrency asset class.
However, the lack of custodian solutions and institutional products have prevented institutions from investing in the market.
Santos emphasized that regulatory uncertainty in the market contributed to the skepticism towards the asset class from institutional investors, as investing in assets that could be considered as unregistered securities could lead to serious compliance-related issues with the US Securities and Exchange Commission (SEC).
The SEC only clarified that Bitcoin and Ethereum are not considered as securities under existing regulations in mid-2018.
As such, Santos explained that continuous imposition of positive regulatory frameworks in the global cryptocurrency market could allow the asset class to attract an increasing number of institutions in the months to come.
“The most powerful force to reverse such negative sentiment would be market regulation. If the crypto market is ever to establish itself as a credible alternative asset class, it will need a set of rules that will weed out fraudulent activity and encourage stable growth, which should attract the deep pockets of institutional investors.”
Speaking to Bloomberg, Ripple Labs executive Ryan Zagone stated that the days of protecting cryptocurrencies as anonymous assets structured to circumvent regulations are over. He explained that regulation has to be established to facilitate the growth of the industry and the philosophy of dismissing the authorities and regulatory frameworks is immature.
“Regulation is, in fact, a betrayal of the origins of Bitcoin, which was built around anonymity and skirting government oversight. This philosophy is unrealistic and immature.”
The entrance of Fidelity, Goldman Sachs, and Citigroup into the cryptocurrency market as custodian service providers reflects the green light provided by the SEC and local financial authorities to open the cryptocurrency market to institutions and investment firms.
But, a Bitcoin exchange-traded fund (ETF) is yet to be approved. Analysts expect the VanEck and Cboe ETFs to be approved by early 2019. Still, the approval of a Bitcoin ETF remains as a key regulatory decision for the SEC, which would recognize the global cryptocurrency exchange market as a solidified and established sector.
The SEC has clarified its stance towards the cryptocurrency exchange market and the Bitcoin futures market operated by CME Group, Cboe, and soon Bakkt; it firmly stated that the two markets have insufficient liquidity to handle an ETF.
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