The world of cryptocurrency is steadily expanding and gaining popularity, leading to increased interest in digital currencies as an asset class. We recently hosted an informative roundtable, Virtual Digital Assets & Crypto: Innovative Asset Class, where experts from Fidelity Digital Assets, Bitwise Asset Management, and Wolf & Company discussed how asset managers can incorporate digital assets into their offerings and gave insight into why they might be a viable investment option now and in the future. Answering timely questions submitted by attendees, Josh Deems and Matthew Hougan also dove into compliance considerations in this area, current trends in financial advisors’ attitudes towards cryptocurrency, and how to integrate digital assets into investment strategies.
We’ve compiled a few key takeaways from this event to provide the crucial information needed before investing in digital assets.
Market Structure
The crypto ecosystem is moving from an unregulated market to an institutional regulatory system. However, there are still parts that aren’t well regulated and some parts where regulation is evolving. Due to the inconsistency in regulation, investors must be careful when determining if they want to invest in digital assets, and if so, which assets may serve their goals best. They need to recognize that this market varies greatly from a traditional capital market structure and that it’s currently transitioning from a retail market to a more institutional market.
Regulatory Environment
The evolution of this asset class has outpaced its regulation and agencies are scrambling to keep up. Here are the main regulatory agencies emerging in this space and what they’re prioritizing to take this sector from retail to institutional.
U.S. Securities and Exchange Commission (SEC)
The SEC is heavily focused on the enforcement of unregistered securities offerings. They’re currently looking into approving an exchange-traded fund (ETF) for digital assets, determining if broker-dealers can custody digital assets, and redefining what it means to be a qualified custodian.
U.S. Treasury Department
The U.S. Treasury Department is prioritizing creating rules to properly track digital asset transactions.
Commodity Futures Trading Commission (CFTC)
The CFTC is interested in enforcing regulation around unregistered trading platforms. They’re looking at regulating decentralized finance (DeFi) and the native applications used to transfer value digitally.
Office of the Comptroller of the Currency (OCC)
The OCC has a lot of confidence in the potential of digital currencies, and it’s currently working to change some of the adoption-reluctance seen in this space. To help organizations become more comfortable with these advancements, the OCC issued several interpretive letters detailing how to enter into transactions (or develop services) involving digital currencies. They’re also working with federally chartered banks to hold crypto assets on behalf of their customers.
What Investment Advisors Must Consider Prior to Entering This Space
This is a disruptive technology that’s going to change the future of finance, and as such, it comes with a number of challenges that investors must recognize.
Although we spoke about how regulators are trying to catch up, it’s far more regulated that many people think. Many regulatory agencies have their hands in the crypto space and you must adhere to these regulations to avoid compliance issues.
Also, because there’s currently no digital asset ETF, the investment products available in the space won’t always fit cleanly into your portfolios or your reporting software. Without an ETF, it’s not easy to customize any digital asset fund with a traditional advisor custodian and report it through your specific software.
Lastly, investment advisors should be aware that there will be more enforcement actions and regulatory steps taken in crypto—and that’s going to be a great thing for the market. Many intuitions are hesitant to enter the digital assets market due to a lack of regulation. Increased regulatory scrutiny and rulemaking will make more institutions comfortable enough to adopt the use of crypto, which will contribute to its growth down the line.
Central Bank Involvement in Cryptocurrency
As the digital asset industry grows, it’s predicted that more central banks will begin to issue their own digital currencies. Central bank involvement will help normalize the idea of digital representations of value and help familiarize investment managers with how to properly use cryptocurrency. This familiarity and normalization will accelerate its adoption, make room for further advancements, and unlock its potential.
However, central bank involvement in cryptocurrency will present a fair amount of competition to the private segment of the market because it introduces:
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- Exponentially faster settlement
- Programmable money and DeFi
- Digital property rights (like digital gold or tokens)
A central bank digital currency (CBDC) speeds the transaction settlement time for institutions or individuals trading this currency. For example, you want to send $5,000 to an account in another country through a traditional banking system. The wire takes two days and the fees are high at 4%. However, with a digital currency, you can wire a significantly higher amount (say, $1 billion) to the foreign account instantly for less than a dollar.
Digital currency is also a 24/7 market, as opposed to the normal business hours of traditional banking systems.
There’s some concern around the ethics of CBDCs, as there’s a greater degree of surveillance involved. With CBDCs, the government will be able to track what you’re spending and who you’re paying. This will give the government a greater understanding of how money’s flowing in and out of the economy, which can be viewed as negative or positive.
Conclusion
The Virtual Digital Assets & Crypto: Innovative Asset Class was packed with valuable information surrounding the state of cryptocurrency today and how investment advisors can harness these assets to enhance their offerings. It crucial for investment advisors to know the nuances of this space to adequately use them for the benefit of their clients. To review the strategic information covered during this session, please view our presentation and recorded session.
