As investor interest in cryptocurrencies continues to mount, regulators are sharpening their focus on the asset class. Though education remains a key impediment to growth, investment opportunities in new areas, such as decentralised finance, are ripe.
By and large, institutional investors have been hesitant about delving into crypto investments. Though reputable managers like Larry Fink and his ilk have heralded the age of digital assets, adoption remains relatively low.
According to Konstantin Anissimov, executive director, CEX.IO, the answer lies in regulation: “The safety that comes from regulations is beneficial and will ultimately help the industry mature. Having this clarity means institutional investors will know whether they are getting involved with a reputable counterparty or not. This reduces the counterparty risk, which will allow them to get involved with crypto. This will therefore drive adoption up substantially.”
Recent steps taken by regulators across the globe are a solid indicator of what’s to come in the space. “We’re currently seeing national governments become more active in the drafting of crypto legislation. These bills are forcing market participants to satisfy requirements related to tax reporting, follow regulations against money laundering, adopt truthful, transparent marketing messaging, etc,” outlines Anissimov.
While some of the rules are rather strict, they protect investors and establish a legal framework for businesses and consumers to work together. In addition, these regulations establish rules of engagement and a path for market participants to further integrate into global economic activity. Exchanges disinterested in compliance may find themselves increasingly isolated, with difficulties connecting to the fiat world.
Jumping the knowledge hurdle
The second hurdle impeding more widespread adoption of crypto investments is related to education. With crypto, legacy investors are facing an asset class which operates very differently to anything they know and understand.
“You cannot transpose the workings of traditional financial instruments into digital assets, although people like to try and do that. For example, clearing and settlement which exists in traditional finance is simply not needed in crypto,” Anissimov notes.
The rise in digital assets and digital securities exchanges might lead to clearing houses becoming redundant: “Once several major regulated exchanges support digital assets and are all on the blockchain, there will be no need for clearing houses,” Anissimov observes. “The potential for such significant shifts in the market can make people apprehensive. Things have worked this way for decades and now this new asset class is dictating that things should change. This is not easy to adapt to which is why education is very important, although it’s a gradual process.”
From its vantage point as a trusted and secure bitcoin and crypto exchange CEX.IO can provide advice and help boost education in the space. Anissimov says: “We
know how things operate and how to approach the whole process to ensure assets are kept safe throughout the transactions. We have a lot of knowledge to share.”
Cryptocurrency exchanges like CEX.IO allow investors to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies. As consumer adoption of digital assets soared throughout 2021, regulators have been looking for ways to set standards for crypto exchange operations.
Centrality of exchanges
Anissimov details the challenge inherent in this exercise: “Regulators are trying to use traditional moulds to shape a cutting-edge industry which is not always comparable with the legacy financial system. In view of these difficulties, market participants must rise to the challenge of balancing cutting-edge innovation while incorporating what they do into existing regulatory frameworks. Exchanges that successfully achieve this balance are poised to win.”
Amidst increasing competition however, exchanges also enjoy ample opportunity for growth, given their deeper blockchain integrations as consumer adoption escalates. For example, the rise of Proof-of-Stake (PoS) cryptocurrencies come with the potential to add new services and attract more customers.
Anissimov also recognises that exchanges also have an opportunity to leverage their native wallets to offer additional services on the custodian front: “As more businesses join the movement to accept crypto as payment, they will need a custodian to hold proceeds, and a place to settle and convert them into fiat. Asset managers will establish exposures to digital assets, and secure custody is critical to this.”
Therefore, custody or crypto insurance solutions tailored to various business needs will present another expansion opportunity in 2022.
In addition, decentralised finance (DeFi), is another area which is ripe for growth. According to analysts at advisory Gartner, the technology powering the peer-to-peer financial services on public blockchains will be eligible for enterprise adoption next year, pending clarity on regulatory guidance.
DeFi(ne) the future
“If enterprise adoption of DeFi technology happens, it follows that traditional, centralised financial institutions could embrace maturing applications, integrating them with blended CeDeFi offerings,” anticipates Anissimov, noting CEX.IO is also developing CeDeFi and DeFi directions.
Moreover, as customers gain confidence, services such as these offer the potential for higher returns, with commensurate risks. “Given these circumstances, we anticipate that DeFi /CeDeFi sectors will see a heightened level of consumer interest in 2022,” he says.
Anissimov also expects to see a move towards more DeFi-centric hedge funds being registered: “Hedge funds are generally very innovative and daring in the way they invest. I wouldn’t be surprised to see more financial professionals being trained and well-regulated in the space. As long as they apply reasonable risk measures and protections, they have the ability to invest into these DeFi initiatives and reap the benefits of doing so.”