With the pace of change and volume of information (and misinformation) surrounding cryptocurrency, it can be difficult to discern fact from fiction. However, if you ignore the frenetic market fluctuations and look at policymaker actions, a clearer future path may emerge.
Cryptocurrency is one of the most talked about and least understood market innovations of recent years. The market is seeing frenzied trading activity, tsunami-like price volatility, and new coin launches. Whilst the industry shows little sign of slowing down, it is important to note that for now, the majority of cryptocurrency activity is conducted outside the regulated financial system.
With much of the coverage focused on exposing bad market actors, money laundering, system outages, and cyberattacks, it’s unsurprising that global regulators have been quick to scrutinize and address its significant associated risks. The potentially seismic market, plus associated transactional and reputational risks, bar much of the market from considering the dubbed “cowboy currency” a viable investment option.
However, 2018 may prove to be a watershed for cryptocurrency adoption, as global regulators have committed to addressing the concept and organizing themselves around it. Their activity may shed light on the future of cryptocurrency. How regulators seek to safeguard investors from the risks will determine its long-term viability as an investment vehicle. At the governmental level, there has been a wide spectrum of approaches across countries ranging from blanket bans to proactive support to implement cryptocurrency.
In January, the Securities and Exchange Commission (SEC) issued an open letter highlighting what they viewed as investor protection issues to address before they would allow US asset managers investing in crypto assets to offer funds to retail investors. The letter questions issues such as valuation, liquidity, asset safekeeping, and market manipulation.
Less than a month later, Jay Clayton, Chairman of the SEC, and Christopher Giancarlo, head of the Commodities and Futures Trading Commission (CFTC) jointly testified before the US Senate Banking Committee on the status and future of cryptocurrency regulation. They suggested the current regime is incomplete and fragmented between agencies, leaving them without discretion to adequately regulate virtual currency. They also requested a new Federal regulatory framework to govern cryptocurrency.
Whatever shape the rules take, it is likely that US policymakers will form the basis for global crypto market regulation. The questions raised by the SEC will offer a roadmap for cryptocurrency providers who want to resolve those concerns and offer a regulated, scalable product.
One week after the US senate hearing, European regulators issued a joint statement warning investors of the risks of purchasing virtual currencies. The Central Bank of Ireland described virtual currency as “highly risky” and reminded investors cryptocurrency offers no legal protection to consumers, is subject to price volatility, lacks transparency, is open to operational disruption, and may contain misleading information.
However, European policymakers have been generally positive regarding the adoption and usage of distributed ledger technology (DLT) such as blockchain, which underpins cryptocurrency. In January, the European Commission announced plans to establish a roundtable composed of public authorities and private sector representatives to discuss the impact of cryptocurrencies.
February provided yet another indication of regulators engagement with cryptocurrency when the European Commission announced the launch of the EU Blockchain Observatory and Forum which aims to encourage EU governments, industry leaders, and retail investors to take advantage of DLT opportunities.
The topic of cryptocurrency is also front and center on the agenda for the G20 Finance summit in March in Buenos Aires. Many see this as an unprecedented opportunity for global cross-border payments.
It seems unlikely the market frenzy on cryptocurrency will stop any time soon and it’s important to strike a balance between rushing to market and missing the boat. But the savvy asset manager is welcoming regulation and waiting for the framework of a secure investment tool. Asset managers should take a breath and think about what the future might mean for their business.