Bitcoin has proven itself to be more than just a fad over the past decade. Leading figures within the traditional Financial Services industry might still deride it as an elaborate Ponzi scheme, but even they will find it increasingly difficult to ignore the continued growth of the asset class and the soaring interest in it from institutional investors. Although regulation for cryptocurrencies might appear to be a contradiction in terms at present, investors will inevitably require clearer terms for engagement.
Whatever the future holds for cryptocurrencies as an asset class, it is all but certain that for institutional investors, retail and professional traders to fully accept its legitimacy there will need to be well-defined and impartial regulation. One of the main obstacles to achieving this is the lack of consensus on how to define cryptocurrencies, and should they be considered a commodity, a currency or a security?
Although regulations vary in different regions, the European Commission’s recent Regulation of Markets in Crypto-assets (MiCA) proposal sets out far-reaching licensing laws for exchanges and services providers to provide a single licensing regime across all member states by 2024. The clarity and ambition of MiCA is clear and might well see the UK and USA left behind as more cryptocurrency service providers move to Europe to build legally compliant products for institutional investors and professional traders.
As an asset class, Bitcoin has grown from nothing to roughly $250bn in just over a decade, and Decentralised Finance (DeFi) has grown as an asset class from nothing to over $12.5bn in just a few years. Impressive though these numbers may appear, they still remain tiny when compared to other asset classes, such as Gold, or leading blue-chip companies, such as Apple, which stand at $9 trillion and $2 trillion respectively. If Bitcoin and DeFi are to ever reach that level of technological maturity and mainstream acceptance, assurance and regulatory security will need to be provided to investors and participants.
In order for this to be achieved, a number of issues will need to be addressed. These include: transparency, custody and settlement, trading and cyber security and systems integrity. Investor protection concerns for these areas can be addressed through KYC and AML that are not typically responsibilities borne by regulated markets that trade securities. Crypto-asset trading platforms such as Bittrex Global involve cross-border trading challenges (particularly related to the origin of investors that can be domiciled anywhere in the world). Enforcement is often difficult as the rules governing the trading of a particular product on a particular exchange may vary between legal jurisdictions. This is why MiCA and regulation in general matters. Tax payers, governments and businesses benefit from having a clear and level playing field that is easy to understand and enforce.
Ultimately, any financial system, whether it be government-backed fiat currencies, cowrie shells on a desert island or digital currencies issued according to a pre-set computer code, needs to have a clear set of rules to ensure trust in the system is maintained. Credit after all comes from the Latin “credere” to believe, and only when there’s a collective belief in the integrity of financial systems and institutions, with clear rules of engagement, will institutions and more reputable traders trust their funds to this new area of finance.
The technology exists to unleash enormous disruption to the existing infrastructure for finance and many other sectors, however for it to move beyond being a small niche area understood by computer geeks it will have to accept supra-national rules for governance. Although regulation might go against the initial decentralized aims and principles of the cryptocurrency pioneers, it’s safe to say the last decade has confounded most people’s expectations and imagination regarding the potential and application of blockchain. For it to reach its true potential over the course of the next decade, governments must work with service providers and technologists to create the supportive environment to ensure this becomes a reality.
– Stephen Stonberg, CFO/COO at Bittrex Global