By Charles Hayter, CEO, CryptoCompare
First published on Tabb Forum, 17 October 2018
Adoption of cryptocurrencies is increasing exponentially, with some reports of crypto exchanges adding more than 100,000 users per day. Likewise, institutional investors are actively monitoring the asset class, given the usefulness of cryptocurrencies in the diversification of portfolios. Last year alone, the buying and selling of digital currencies generated $1.8 billion of fees at the largest crypto exchanges, which is equivalent to approximately 8 percent of the revenue seen on traditional exchanges. Whilst cryptocurrencies have had their detractors in the past, that viewpoint is clearly changing at a rapid pace with many more wagering crypto is here to stay.
As the cryptocurrency industry moves out of its infancy, crypto data is already beginning to be monetised by both retail and institutional investors, with the whole ecosystem shifting to become an institutional-grade cryptocurrency industry. The arrival of incumbent market participants into this sector, for example the CME and CBOE offering crypto futures contracts, will only serve to improve the crypto trading market infrastructure further. We are even starting to see collaboration between crypto trading start-ups and established institutional vendors due to the recognised potential.
Hurdles to overcome
There has been a disparity in investment response up to this point, however, with hedge funds and family offices more active in the space than traditional asset managers. This uneven reaction amongst asset managers is mostly due to the presence of certain obstacles that are impeding the move to actual institutional investment. These hurdles include a fragmented regulatory climate, lack of legal compliance, and the need for more reliable data.
The regulatory landscape in regards to crypto assets is fractured at best, with some countries such as China and South Korea clamping down, while others such as France, Switzerland, Malta and Gibraltar steaming ahead and drawing up rules to formally regulate the space in an attempt to attract fintech business. Other countries remain cautious. The US is citing concerns about investor protection due to risks of market manipulation. A recent UK House of Commons Treasury Select Committee Report stated that “regulation could lead to positive outcomes for the cryptoasset market, including the move toward a more mature business model and increased liquidity,” and encouraged that crypto-assets should be brought into the scope of existing regulation, rather than creating a new framework specifically for the assets.
Institutional Investors are also hesitant about the custody of digital assets. Traditional investors’ securities are held with custodians - registered financial institutions that hold funds for safekeeping against theft and loss. Yet up until recently there has been a lack of reliable custodian services for cryptocurrencies all across the globe due to uncertainty in the regulations. Concerns remain around the legitimacy of the various digital wallets, where and how to properly store the keys for crypto wallets, identifying trading counterparties to ensure the safekeeping of the assets, how to fulfil KYC, as well as transparency around markets. In brief, because there is no way to legally secure money, traditional institutional investors are reluctant to take on that risk.
Lastly, there is a strong institutional demand for existing crypto infrastructure to provide more reliable data and better governance of that data. In order to make sound investments, decisions need to be made from accurate data sources. Institutional investors are concerned whether or not they can rely on current pricing methods. For example, is the data as accurate, fast, and comprehensive in terms of depth and breadth of analysis as equities, particularly during times of high volatility? There is a need for a standardisation of data from reliable crypto exchanges in order to provide a comprehensive overview of the market.
Essentially, investors need a better understanding of the cryptoasset landscape to better inform any investment decision process. Interconnection between exchanges also needs to be improved to bring trading up to par with other assets. Currently, there is no standard way of defining and measuring crypto data.
Industry stakeholders, recognising the need for a standardised language, have started work on a number of initiatives, including:
- The FIX Trading Community Digital Currency Working Group is developing a set of best practices for cryptoassets and has created a proof of concept of a high performance trading venue;
- Global Digital Finance (GDF) has published for public comment a Code of Conduct for cryptoassets;
- CryptoCompare has recently released a Taxonomy report providing an independent classification of cryptoassets, formed from a detailed analysis of 200+ cryptoassets, and based on more than 30 unique attributes, covering a range of economic, legal and technological features.
Each of these efforts can hopefully be used to help educate market participants and regulators, who can work on implementing industry-wide guidelines to help protect consumers whilst at the same time ensuring that the fledgling industry is not snuffed out.
Confidence is key
Institutional and retail investors have already taken notice of the potential of cryptoassets; however, a lack of consistent regulation, custodianship and data standardisation are bugbears of the industry as it stands today. Ultimately, as the market infrastructure matures, investors need confidence in crypto markets and the ability to navigate clearly in order to make well-informed investment decisions, leading to the increased adoption of crypto trading for all. Having a common language and standardised data sets to navigate through this fledgling asset class seems a natural place to start.