Hedge funds and asset managers are deploying digital asset teams, but a lack of regulatory clarity is holding them back.
The recent liquidity crisis at FTX will increase regulatory scrutiny in the crypto industry, which is what institutional investors are seeking, a number of sources told Cointelegraph on Nov. 10.
“This event will be used as a cornerstone to spark new crypto regulations, which is good for the healthy development of the industry. A more comprehensive regulatory framework has the potential to protect long-term investors from fraud and other risks,” stated Julian Hosp, co-founder and CEO of Cake DeFi.
As a matter of fact, October was a significant month for crypto adoption, as big players in traditional finance announced moves into the digital asset space.
BNY Mellon, the oldest American bank, disclosed its digital custody platform to safeguard select institutional clients’ Ether (ETH) and Bitcoin (BTC). Also, France’s Société Générale bank received regulatory approval as a digital assets service provider. Finally, Fidelity expanded retail access to commission-free cryptocurrency trading services.
Developments by established global players are not a coincidence but rather illustrate a scenario where digital assets are a reality for financial institutions. “It takes deep conviction and significant buy-in for a well-established incumbent to enter an emerging asset class amidst market conditions like we’ve witnessed in 2022,” said Sebastien Davies, principal at the digital asset infrastructure provider Aquanow.
Millennial and Gen Z consumers are set to inherit $73 trillion over the next 20 years in the United States alone, according to a recent report from Cerulli. As of December 2021, about 48% of millennial households and 20% of all U.S. adults owned cryptocurrency.
“When you combine the spending power of younger generations with the notion that banking relationships tend to be sticky, and the fact that today’s youth have embraced digital assets, then it becomes clear why so many institutional investors are no longer holding back from entering this new asset class,” stated Davies.
As reported by Cointelegraph, BNY Mellon CEO Robin Vince said in a conference call following the bank’s quarterly results that “client demand” was the “tipping point” that ultimately led to its launch of institutional-focused crypto services in October. He pointed to a survey conducted by the bank this year that found that 91% of large institutional asset managers, asset owners and hedge funds were interested in investing in some type of tokenized asset within the next few years.
Investors are being turned off by the lack of regulations. “The largest hedge funds and asset managers are currently deploying digital asset teams and are looking to build out their strategies. The uncertainty in the regulatory environment is the main hurdle holding them back from diving in deeper,” Adam Sporn, head of U.S. institutional sales at digital asset custody provider BitGo, told Cointelegraph.
With nearly $64 billion in assets under custody, BitGo works with traditional hedge funds and fund managers in an industry that is evolving without regulatory clarity. “VCs continue to make investments in the digital asset space, where they receive token allocations that need qualified custody. Additionally, family offices are continuing to come off zero-percent allocations to one- to five-percent allocations,” stated Adam.
One of the current major concerns is how the ongoing digital shift could affect countries’ economic power as lawmakers are faced with the challenge of fostering innovation and protecting consumers simultaneously.
“Lack of clarity in the regulatory framework in the U.S. is holding back institutional adoption and is driving firms to move overseas, which means innovation is also moving overseas,” said BitGo chief compliance officer Jeff Horowitz, adding that “we don’t need to call all tokens securities to achieve that.”
The current crypto turmoil — the second major crisis in 2022 — is not a game-ender for institutional investors, Ryan Rasmussen, a crypto research analyst at Bitwise, told Cointelegraph, adding:
“Investors and institutions already allocating to crypto can distinguish what was going on at FTX and Alameda from the real innovation happening across the broader crypto industry. I wouldn’t be surprised if those investors are adding to their positions at these prices.”