Cryptocurrency's promise of decentralization and lack of regulation allowed it to skyrocket from a mere concept in 2008 to an approx $275B market cap industry at the time of this writing. This incredible growth, along with the birth of a vocal crypto-bourgeoisie, has inspired many retail investors to dive into the market.
However, to large institutional investors this lack of regulatory clarity and considerable price volatility has actually been seen as a barrier to entry. Add security risks and a fundamental lack of market knowledge, and it’s been a barrier that’s proven seemingly insurmountable - until now. Facing substantial losses since the Dec ’17 bull run, individual investors have not been purchasing crypto with the same abandon they once were. But a host of recent developments suggest that institutional investors may finally be ready to pick up the slack.
Signs of this potential influx have been subtle, but telling.
Bloomberg & Thomson Reuters, two of the most recognized and trusted names in finance, have been expanding their cryptocurrency monitoring services for months.
Just yesterday on July 16th, the CFA Institute, who trains and certifies hundreds of thousands of financial professionals, announced they're adding topics on cryptocurrencies and blockchain to the CFA exam for the first time next year. Managing Director of Curriculum Stephen Horan went on to say:
"We saw the [cryptocurrency] field advancing more quickly than other fields and we also saw it as more durable. This is not a passing fad."
Further, a string of regulatory developments in recent months paint a rosier picture for institutional entry into the market. And with an estimated $85-90T USD in global Assets Under Management from the likes of investment firms, hedge funds, sovereign wealth funds, pensions funds, endowments, etc. – the impact could be staggering.
REGULATORY AND LEGAL DEVELOPMENTS
In a recent and much-anticipated US hearing, the Securities and Exchange Commission declared that Bitcoin and Ethereum would NOT be classified as securities. While the ruling did not extend to smaller tokens and those launching ICOs, the announcement provided at least some clarity to US investors on the 2 largest cryptocurrencies by market cap.
One of the more explicit and progressive instances of crypto-friendly regulation has come out of Malta – aka Blockchain Island. As we’ve reported before, the government of Malta has signed three blockchain bills into law that provide a clear regulatory framework for the market there. Investors have been watching these developments with a keen eye and view them as another step towards the larger legal acceptance of crypto-assets.
And in just the last few weeks we’ve seen country after country clarify (if not reverse) their stances on crypto. South Korea recently announced a host of plans to create classification standards for the blockchain industry. Thailand’s SEC officially legalized seven cryptocurrencies and unveiled details of a friendly regulatory framework for their domestic industry. Even India, after months of uncertainty, has opted to reevaluate their blanket ban on cryptocurrencies.
These regulatory developments coupled with the growing number of ‘institutional entry points’ in the crypto market are leading many to believe the big money may be ready to come off the side lines. Below we outline how these entry points are being developed and what they could mean for the industry.
The world’s largest exchange-traded fund (ETF) provider, BlackRock, with a staggering $6.3T USD in AUM announced the formation of a working group to assess potential involvement in Bitcoin. The move serves as a stark reversal of BlackRock’s previously critical stance towards cryptocurrency, with CEO Larry Fink describing Bitcoin just prior to last year’s ATH as “an instrument people use for money laundering.” The market jumped on the news with most of the top market cap crypto assets showing strong gains.
Goldman Sachs backed Circle Internet Financial, a blockchain payments and crypto trading system provider, acquired popular US based crypto exchange, Poloniex, for over $400MM USD this past February. They also raised an additional $50MM with Goldman’s support this past May. The Circle Trade platform, which allows investors to trade exceptionally large block orders of cryptocurrency, has seen a 30% increase in institutional investment and a 15x increase in trading volume.
CBOE (Chicago Board Options Exchange)
Both CBOE Global Markets and CME (Chicago Mercantile Exchange) made waves with their launch of bitcoin futures in Dec 2017. Last month we learned CBOE is taking it one step further, partnering with Van Eyck Investment and SolidX to introduce a Bitcoin ETF to global markets. Previous applications to launch Bitcoin ETFs by CBOE, Gemini, and SolidX were rejected by the SEC due to the global regulatory uncertainty and instability in cryptocurrency markets at the time. However on June 26th, the SEC revealed a proposal to ease the approval process and “modernize the regulatory framework for exchange-traded funds,” lowering the barrier to entry for innovative new crypto-based ETFs.
Fidelity, the American investment behemoth that oversees $2.5T USD in assets, was recently reported as looking for a DevOps System Engineer “to help engineer, create and deploy a Digital Asset exchange to both a public and private cloud." The report indicated that Fidelity has also been working on developing custody solutions for cryptocurrency. If Fidelity were to launch an exchange, it would be one of the largest direct plays to date by Wall Street into the market for digital assets.
While it’s easy to get caught up in the hype of Wall Street, global financial institutions seem to be following suit in the crypto chase. Traditional banking giant SBI Holdings, based in Tokyo and an influential presence on the Global Forbes 2000, officially released their own cryptocurrency exchange to the public in Japan. Partnering with Ripple to launch VCTRADE, this important milestone marks the world’s first bank-backed cryptocurrency exchange launch.
Hedge funds have already taken the first steps with Steven Cohen, the once dubbed “hedge fund king,” entering the crypto space recently. Cohen has invested in cryptocurrency-focused hedge fund Autonomous Partners through his VC firm Cohen Private Ventures. It was also recently reported that Georgie Soros has given his $26B USD hedge fund the go-ahead to begin trading in cryptocurrencies. While substantial, these moves are likely just the beginning of the less regulated hedge fund class making larger crypto plays.
Crypto-Institutional Lines Blurring
Coinbase recently launched its much anticipated Coinbase Custody service, geared towards larger institutional clients. Currently Coinbase is responsible for $20B USD in crypto assets and hopes to attract over $5B for the service by the end of 2018. To launch Custody, Coinbase partnered with ETC, an SEC-regulated broker-dealer and FINRA member.
Just yesterday on July 16th and on the heels of multiple acquisitions, Coinbase received official SEC approval to list security tokens on their exchange. According to the Coinbase blog, they hope to "make digital currency investment accessible to every eligible financial institution and hedge fund in the world." With these bold and rapid moves, their ambition may be coming to fruition sooner than later.
Blockchain.com announced a new service which exclusively targets institutional investors. Titled Blockchain Principal Strategies (BPS), this new service offers an OTC trading desk to institutional investors. CEO Peter Smith wants BPS to fill a growing need for an all-in-one service for institutional investors by offering services which others cannot. BPS is touted as being able to provide unparalleled insights into market fundamentals, risk metrics, and access to a world-leading research team.
Litecoin Foundation & Binance
While traditional banking giants continue their moves into crypto, some crypto players with their own deep pockets have been eyeing the reverse. Recently the Litecoin Foundation partnered with TokenPay to acquire a 9.9% stake in the German bank WEG Bank AG. In a potentially more innovative banking play, top crypto exchange Binance is backing the formation of the world's first 'decentralized bank' in Malta to be known as Founders Bank.
As these crypto-institutional lines continue to blur, we’ve also seen a talent war escalate between the traditional financial and blockchain/crypto sector. And crypto seems to be winning. Just recently Gemini recruited the New York Stock Exchange’s (NYSE) CIO to serve as CTO of their digital asset exchange, and have even partnered with NASDAQ to leverage tech for fighting price manipulation. Another move worth noting came from Australian cryptocurrency exchange, bitcoin.com.au, who appointed former consulting giant PricewaterhouseCoopers (PwC) executive Ben Ingram as its new CEO.
All of this activity combined with crypto prices at their lowest in almost a year points not surprisingly to a bullish direction for the overall market.
At Quadency we follow these developments closely, so it's also important to note just how quickly these banking giants can pivot on crypto. For example even the publishing of this article was delayed 24 hours due to some of the above news happening in real time with market moving headlines.
So the story is far from over and there’s no guarantees on the execution and impact of all this ‘institutional interest.’ But taken together, we would at least have to agree with CFA Institute’s Stephen Horan that seemingly, “This is not a fad.”