By Oliver Linch, CEO of Global bittrex
The most recent events in the crypto landscape have shaken up the crypto exchange ecosystem and landscape that we once knew. Despite the usual suspects using the fall of FTX, which came in the midst of what was already an ongoing “crypto winter,” to proclaim – for the umpteenth time – the death of crypto, all the evidence is that institutional investment is just as strong today as it always has been.
But those of us in the crypto industry should not take this for granted.
With over 3.3% professional investors putting money into crypto, and almost every major bank now has a major crypto office, it’s fair to say that digital assets are no longer just of interest to speculative investors, but indispensable for any financial institution before- guardian. Institutions realize that now is the time to engage, lest they run the risk of being left behind. Although today’s digital asset landscape is significantly different than in 2021, institutional interest in crypto as an alternative investment model is still very strong, especially among funds and asset managers. most agile assets, which were and remain ahead of the curve. .
Big banks, so often the heavy beasts of the financial industry these days, were slow to realize the potential of crypto and spent much of 2021 and early 2022 scrambling to make up lost ground. . The arrival of the bear market in mid-2022 and the ensuing scandals may have spared the short-term blushes of traditional bankers who failed to seize opportunities to get involved in crypto sooner or who , with perhaps some justification, were wary of the threat posed to their traditional ways of investing and antiquated banking systems. However, the underlying analysis and medium to long-term potential for crypto remains firm, and all evidence suggests that banks continue to invest heavily in crypto products and services.
While it is clearly not true that institutions have slowed down sharply, a look at transaction volumes overall shows that they have slowed down. A fair amount of work is still going on behind the scenes, as institutions and market players work increasingly closely together to figure out how to engage with crypto in a meaningful way. So the question is how can crypto market participants entice these institutions back into the industry.
There is no deep mystery here. In fact, the institutions are very clear that they are looking for three key elements: regulation, security and innovation.
On the regulatory front, institutions are rapidly reassessing their relationships with counterparties. Quality is now much more important than quantity, as major players revisit previous assumptions and, in particular, redefine the weight assigned to a properly and securely regulated counterparty. Whether out of ignorance or naivety, institutions had apparently fallen into the trap of assuming that all crypto exchanges were essentially similar, and therefore focused their assessments primarily on price. Even for institutions that engaged in (at least the language of) regulation – and FTX was certainly one of them – too little scrutiny was given as to where an entity was regulated.
This may be because the traditional financial industry has, over many years of concerted effort, effectively eliminated significant regulatory arbitrage in major jurisdictions. There are certainly differences, but the main regulatory obligations are generally quite similar, especially since global standards have been established. Whereas in crypto, institutions have failed to determine where entities are regulated, by what standards, and how those standards are enforced. Too little additional credit has been given to entities that have held themselves to strict standards in jurisdictions with significant regulatory regimes. Additionally, exchanges and other participants used complex legal structures, so it was often unclear whether it was actually the regulated entity that was entering into the transactions. Too often this was not the case, and the regulated entity sat in a trophy cabinet gathering headlines and dust, while the real business was done by unregulated affiliates.
If there is anything good to come out of the scandals of 2022, it is the consensus on the importance of good regulation of the sector both by policy makers and, perhaps still too reluctantly, by industry players. Whether it is a new regulation such as that of the EU MiCA Proposal or the The UK’s renewed commitment to a crypto future, this will have a positive effect and move the industry forward.
Security is the second major demand from institutions as a prerequisite for re-engaging with crypto. The “not your keys, not your coins” brigade will always be around, but even among mainstream crypto participants, the relationship between centralized and decentralized crypto is being reassessed. Exchanges and other participants who lack seriously robust security technologies and procedures will simply be shunned by institutions. As with regulation, banks expect their counterparties to invest as much in security and infrastructure as they do. Of course, no system is completely impenetrable, but exchanges and tokens that sprung up in the frenzy of the bull market and never managed to implement a robust security program either have to adapt very quickly or die.
All of this is a precursor to allowing institutions to do what they really want to do with crypto, which is to innovate. Traders, in particular, come with decades of analysis and strategies in traditional markets and are quick to adapt and apply them to crypto. For too long, crypto exchanges have arrogantly ignored the needs of traders and other investors, preferring to focus on features that grab headlines but are ultimately unnecessary. Or worse, expensive referral packages. Deep into this crypto winter, however, minds are much more focused. Both parties realize that the potential opportunities are significant and that the relationship between these traders and the exchanges they trade on will ultimately be what drives crypto innovation forward.
These key elements – regulation, security, and innovation – are what will kick-start renewed institutional investment in crypto.
Institutions tell us they still want to be involved in crypto, but we shouldn’t be complacent. These are not easy things to do, and it will take time, effort, and commitment to implement them correctly. However, this is what is needed if we are to allow crypto to continue on its way to mainstream adoption. In the wake of the FTX scandal, these things are no longer a “nice to have”. They are essential, and without them, crypto faces an existential crisis as risk committees and financial industry boards will simply refuse to allow institutions to touch anything crypto-related.
In this turbulent time, we must use increasing institutional investment and outside interests as a launching pad to regulate, secure and innovate within our ecosystem, as we continue to create opportunities for digital assets to thrive globally. within the financial sector.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.