By Erik Wilgenhof Plante, CCO at Sequant Capital
Cryptocurrency, whether it is Bitcoin, Ethereum, Ripple or the others on the market, still faces scepticism from the wider financial industry. Even with Bitcoin in its ninth year, industry leaders such as Mark Mobius continue to lambast the market. With the entire crypto industry valued in the region of hundreds of billions, what can the industry do to make to make cryptocurrency a more trustworthy and asset?
Understanding the lack of trust
Firstly, it is important to understand why the industry is viewed so critically. This lack of trust has been mainly down to how cryptocurrency is perceived within the financial market. With Bitcoin gaining popularity from retail investors and being used to pay for products ranging from pizza to narcotics, there is an understandable scepticism towards the purpose of the currency. For many, the asset has been viewed as a short-lived gimmick or a method of conducting illegal transactions without being caught.
However, much has changed over the years. Cryptocurrency is no longer just for consumers; serious investors have become more heavily involved in the benefits of working with this asset. As a result, the crypto-landscape has changed. In many ways, crypto – especially in Europe – is no longer viewed as a simple currency. Instead, it is a tradable asset that can be included with more traditional products such as property or gold.
Most crypto currencies have a limited supply, capped at a certain amount which by definition will drive the value up. This makes them a very interesting asset class for a large group of investors. As such, cryptocurrency like Bitcoin now forms a part of a wider portfolio for hedge funds and high net worth individuals. As the industry develops, this trend is only set to continue, moving even further away from traditional payments.
With more professionals investing in cryptocurrency, the crypto industry is doing all it can to ensure its reliability and trustworthiness– whether it is setting up governing bodies or providing a set of guidelines for businesses. However, this self-regulating culture can only go so far. In order to be viewed more positively by the wider financial industry, there needs to be more robust governance.
This is where institutionalised investment is needed. The criticisms that industry leaders have raised can only be allayed with tighter controls that protect investments and ensure illegal activity does not take place. Having crypto currency related activity monitored by regulatory bodies such as the FCA will provide much-needed reassurance the financial sector. With this approach, cryptocurrency will be viewed as just another part of the financial services sector, making it more credible in the process, both as an investment and a payment alternative.
Many regulators are already in the process of creating new frameworks specifically catering to the crypto industry. For example, the ADGM financial regulator in Abu Dhabi has proposed a framework that will bring crypto exchanges and brokers under its remit. Equally, the Financial Services Agency (FSA) in Japan has begun registering crypto companies, while the New York State Department of Financial Services(DFS) was the first to possess a Bit license.
Regulation achieves more than just making crypto assets more credible however; with a proper and pragmatic framework the entire industry will benefit. In its current state, it can be easy for investors to worry about whether they are working with a reliable partner, especially considering the numerous exchanges, brokers and currencies in existence. With proper regulation, crypto-services will have to meet security and safety standards as well. The knock-on effect will ensure that investors will be able to trust the people they work with which will improve the image of the entire industry.
What can be done now?
Until this wider change happens, the cryptocurrency sector should be doing all it can to improve its image. This goes beyond simply setting up governing bodies and policing each other. Instead, those in the sector should be looking to comply with existing financial regulations that already apply to the wider market.
Proper regulation does not just mean Know Your Customer (KYC) and Anti-Money Laundering (AML) checks, however. These processes are already common in most financial companies and are an industry standard for anyone wishing to professionally invest in cryptocurrency. Instead, if firms truly want to change financial leaders’ views of cryptocurrency, they will need to go further.
Pursuing compliance with multiple regulations may seem difficult, but despite popular belief, cryptocurrency is not that different from other assets. MiFID II, for example, can set a good benchmark. If a company can comply with this regulation and approach its crypto assets in the same manner, it will be much better prepared for when a more crypto-specific structure comes into place.
Demonstrating compliance with industry regulations will also present a more responsible image to the wider financial industry. Self-governance combined with recognisable standards – whether it is rules set out by the FCA, or specific legislation like GDPR or MiFID II – will increase awareness of cryptocurrency’s credibility. Fundamentally, industry leaders will see that the asset is under the same restrictions and controls as the rest of the financial sector.
Even with the scepticism from industry leaders, cryptocurrency can do a lot in order to be viewed as a reliable asset for investment. Complying with current regulation, whilst also building a self-governing sector, will go a long way in improving the image of the industry and encourage those in the financial services sector – both large and small– to get involved.