Cryptocurrency Industry Must Roll Out The Red Carpet For Big-Money Players

A Bitcoin (virtual currency) paper wallet with QR codes and a coin are seen in an illustration picture taken at La Maison du Bitcoin in Paris, France, May 27, 2015. Photo: REUTERS/Benoit Tessier

By Robert Dykes, International Business Times

Traditional institutions from hedge funds to family offices to investment banks are increasingly looking to enter the idiosyncratic space of cryptocurrencies. Some of the biggest names in finance from George Soros to Goldman Sachs have this year declared their interest in deploying some of their vast capital into the nascent industry.

These entities manage the kind of large-scale, institutional funds any emerging asset class should welcome. Global institutional investors have $130 trillion of assets under management. A tiny slice of that moving into crypto will have a huge positive impact on an industry whose market cap remains under $300 billion. If cryptocurrencies are to come of age, the industry needs to provide the facilities and tools these big-money players are used to.  

Cryptocurrency prices may be down overall in 2018 but the space has seen exponential growth over the past years. Born out of the decentralized technology of blockchain, the success of major currencies such as Bitcoin and Ethereum has also helped spawn hundreds of so-called alt-coins in the last two years. The average daily exchange-trading volume across all crypto assets now surpasses $18 billion, with more than 200 active crypto-exchanges. So far, in the first half of 2018, sales from new token issuances have raised above $10 billion, more than double the amount raised in all of 2017.

This frenetic activity and the potential for gains make the industry difficult to ignore. But the anticipated flood of institutional money is being slowed by three main obstacles the crypto industry must work to fix fast: custody, regulation and trading technology.

Traditional institutions from hedge funds to family offices to investment banks are increasingly looking to enter the idiosyncratic space of cryptocurrencies. Some of the biggest names in finance from George Soros to Goldman Sachs have this year declared their interest in deploying some of their vast capital into the nascent industry.

These entities manage the kind of large-scale, institutional funds any emerging asset class should welcome. Global institutional investors have $130 trillion of assets under management. A tiny slice of that moving into crypto will have a huge positive impact on an industry whose market cap remains under $300 billion. If cryptocurrencies are to come of age, the industry needs to provide the facilities and tools these big-money players are used to.  

Cryptocurrency prices may be down overall in 2018 but the space has seen exponential growth over the past years. Born out of the decentralized technology of blockchain, the success of major currencies such as Bitcoin and Ethereum has also helped spawn hundreds of so-called alt-coins in the last two years. The average daily exchange-trading volume across all crypto assets now surpasses $18 billion, with more than 200 active crypto-exchanges. So far, in the first half of 2018, sales from new token issuances have raised above $10 billion, more than double the amount raised in all of 2017.

This frenetic activity and the potential for gains make the industry difficult to ignore. But the anticipated flood of institutional money is being slowed by three main obstacles the crypto industry must work to fix fast: custody, regulation and trading technology.

Custody

Custody has typically been considered the biggest challenge slowing the entry of institutional participants into the market. There are jurisdictions where it is illegal for an investment fund with more than $150 million under management to custody their own assets. Institutions have to work with trusted third-parties -- banks and financial companies -- that hold their assets in legal safekeeping. The welcome news is that solutions have begun to emerge, as some companies aim to be first-movers to satisfy the institutional demand. As an example, Japanese investment bank Nomura Holdings Inc. joined crypto firms Ledger and Global Advisors to create a custody consortium called Komainu.

Regulation

What is keeping traditional custodians such as BNY Mellon, JPMorgan Chase, State Street Bank or Citigroup at bay? The root of the answer is regulation. While the rules of the game have remained unclear, the institutions have been reluctant to play. One issue is that global regulators have shown little consistency on how to allow innovation in blockchain technology while minimizing risks for investors and the financial system. Financial and banking hubs such as Japan and Switzerland have so far tried an accommodating approach. But China and India have taken a firm stance against alt-coins and crypto exchanges, while a patchwork of different U.S. regulation agencies has yet to coalesce around an agreed framework. As long as crypto remains without a standard definition and treatment, plenty of institutional money will remain sidelined to avoid any legal risk.

Trading

Most observers believe regulators worldwide will come around to working with the serious blockchain industry groups to help the market mature. But there are technical shortcomings holding the space back as well, and crypto needs to prepare for the day when the custody and regulatory barriers are lowered. Currently, when institutions choose to invest, they often struggle to find reliable trade execution. The problem is that the fragmented, volatile crypto trading landscape has shallow liquidity and lacks much of the robust infrastructure that the institutional investors need for their high-volume and high-frequency trading.

These refined money managers demand sophisticated trading tools with risk management, audit, and compliance tools that meet their exacting regulatory and operational needs. In the absence of this, many of the pioneering institutional players that have entered crypto are forced to rely on practices that are almost unheard of in traditional market, such as maintaining manual spreadsheets to keep track of a portfolio. Crypto in many ways is on the cutting edge of innovation. But when it comes to trading, the space is playing catch-up, with institutions writing Python scripts to execute trades and using multiple web interfaces to find the needed liquidity. But thankfully, there are now companies in the crypto space that are rising to the challenge of providing adequate trading platforms. If crypto is to catapult out of its early-adopter phase on the back of institutional money, those solutions cannot come soon enough.

Institutions have an appetite for investing in cryptocurrency. Now the industry has to open the gates, roll out the red carpet and ease their entry. 

Robert Dykes is the CEO of Caspian, a full-stack cryptoasset management platform tying together the biggest crypto exchanges in a single interface.

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