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There are multiple other reasons outside of custody institutional investors have held back from trading cryptocurrencies so far . Trading of the digital assets remains unregulated , while questions remain over liquidity , transparency and valuation . Links to criminal activity and money laundering also do cryptocurrencies no favours when attracting the most heavily scrutinised parts of the financial sector either . Perhaps crypto ’ s most notorious personality trait in the past 12 months has been its volatility , which has attracted many new funds to the space , but few established ones .
Custody not the only issue “ There is little participation from institutional investors , but it is liquid enough to trade ,” said Peter Kambolin , chief executive officer at Systematic Alpha Management . “ If you look at the incredible volatility that all cryptocurrencies are having , it is telling you that investors don ’ t know how to value them .” “ Putting a value on where bitcoin is supposed to trade is difficult , some people think it is zero and others think it is worth one million in the future .” Despite the lingering worries , the lure of this volatile new product could be too much for the buy-side to resist for much longer . One hedge fund trader who preferred to remain anonymous commented that “ at this point , we ’ d rather be involved and stay small rather than not be involved at all ”. Another source explains that members of major buy-side firms are instead using their expertise on the side , by trading the unregulated markets on personal accounts outside of their day jobs . In a chicken and egg scenario , institutional investors are waiting for volatility to steady , but it is the arrival of institutional investors which could steady the price swings . Perhaps the arrival of custodians on the scene could open the gates for them despite the volatility .
Regulatory domino effect Earlier this year , Richard Turnill , Black- Rock ’ s global chief investment strategist , said in a note that trading “ should only be considered by those who can stomach potentially complete losses ”. He added that their volatility made market turbulence during the financial crisis almost look placid .
“ We don ’ t want to get this wrong , if one thing goes wrong then the confidence will be dented .”
TEANA BAKER-TAYLOR , CMO , COINFLOOR
“ Institutional money brings greater volume , for institutions to be able to invest more regularly – if you are a non-regulated entity like a hedge fund or family office , you may already be in the space – regulated institutions like trading desks at major banks need a regulatory framework and you need to understand how those assets are held from a custody side and how they are going to hold it on a balance sheet .” Regulation is possibly the other issue that matches security as holding the key to more institutional investment . “ Why isn ’ t institutional investor money flying into this space ? It ’ s regulatory issues ,” said Achim Illner , CEO at Global Crypto One . Again , this comes back to a lack of custodians providing services for cryptocurrencies , which was one of the main reasons behind US regulators quashing applications to launch Bitcoin ETFs in January this year . The Securities and Exchange Commission ( SEC ) issued a letter asking for firms to withdraw requests to launch the products until multiple issues had been resolved . The SEC ’ s concerns focused largely on investor protection issues . “ To the extent a fund plans to hold cryptocurrency directly , how would it satisfy the custody requirements of the 1940 Act and relevant rules ?” the SEC asked in a letter to the Investment Company Institute and Securities Industry and Financial Markets Association , back in January this year . Each country ’ s national regulator has a stance ; most are supportive with caution , though few have official legislation in place . Some of those most welcoming thus far have been Switzerland , Japan and the UK , while China has outright banned crypto exchanges . In the UK , though no official regulations have been passed , the Financial Conduct Authority ( FCA ) has been lauded by market participants for its openness and willingness to speak to the industry about regulating cryptocurrencies . The big domino effect could come from the US though . According to multiple experts , many institutional investors are waiting for regulatory approval from the SEC before stepping into the cryptocurrency trading world . “ Until there is clarity from the SEC nobody can make moves ,” added Illner . “ When they make a statement all the other guys in Europe will look at what the SEC decides and this will give them direction .”
“ Wall Street is hungry ” In June , the SEC appointed an associate director to work on the application of US securities laws to Initial Coin Offerings and cryptocurrencies , one of its biggest moves yet in support of the growth of the asset class . In the SEC ’ s appointment of its new crypto director , the regulator described cryptocurrencies as a “ dynamic area that has both promise and risk ”. The SEC ’ s regulatory peer in the US , the Commodity Futures Trading Commission ( CFTC ), has also been proactive , claiming earlier this year it is leading an international working group to build consensus and common ground with foreign authorities on cryptocurrency . “ I cannot imagine that they will let it die
“ Why isn ’ t institutional investor money flying into this space ? It ’ s regulatory issues .”
ACHIM ILLNER , CEO , GLOBAL CRYPTO ONE
out because Wall Street is hungry for new things and it is not American to stop new things , so I am optimistic there will be a framework ,” says Illner . Of the two major issues – regulation and safeguarding of assets – there ’ s clearly only one which custodians can solve . Many are playing the waiting game , with their clients doing the same . Ultimately , when it comes to institutional investment , dominos are likely to fall soon enough , and with regulations will come peaked interest , and that demand should prompt more custodians to enter the space . In what capacity , and with what partners and conditions remains to be seen .
32 Global Custodian Summer 2018