In just 10 short years, the global market capitalisation of crypto-assets (i.e. Bitcoin, Ethereum, etc.) has skyrocketed past the $3 trillion barrier. Amid this turbocharged growth, a study by Nickel Digital Asset Management in 2021 found that two thirds of institutions with zero exposure to crypto-assets now intend to make their first investments within the next 12 months. What was once a niche product is now becoming increasingly mainstream with a number of high-profile fund managers - including Fidelity, UBS, State Street Global Advisors, Invesco and BlackRock - all debating whether to give clients exposure to crypto-assets. As more investors start trading crypto-assets, regulations will inevitably follow suit.
Crypto-assets and regulators – a clampdown beckons
While some investors are incorporating crypto-assets into their portfolios, the volatility and lack of meaningful oversight of certain instruments - such as crypto-currencies - has prompted regulators into action.
In 2020, the European Commission (EC) announced the introduction of the MiCA (Markets in Crypto-Assets) regulation, a set of proposals aimed at bringing in much-needed supervision of the crypto-asset universe. Under MiCA, the EC is hoping to create a harmonised framework for crypto-assets including StableCoins; utility tokens, payment tokens and e-money tokens. Among MiCA’s provisions are that crypto-asset issuers and crypto-asset servicers be licensed and authorised if they are to passport freely across the EU.
The US is slightly behind the EU in terms of crypto-asset supervision but the situation is starting to change. Although the Securities and Exchange Commission (SEC) conceded that not all crypto-assets constitute securities per say, the agency asked Congress to give it greater autonomy to monitor crypto-exchanges. It is looking very likely that there will be more scrutiny imminently of the crypto-asset marketplace by US regulators.
On a global level, the Basel Committee has proposed a 1,250% risk weighted capital requirement for banks with exposures to crypto-currencies such as Bitcoin. Nonetheless, other markets are taking an even less accommodating approach to the asset class with several countries (e.g. China) banning crypto-currencies altogether.
But certain types of digital assets do have support
While most governments (with the notable exception of El Salvador) are slightly sceptical about the virtues of crypto-currencies, some are throwing their weight behind different types of digital assets.
A handful of Central Banks are currently launching digital versions of their own currencies – known as CBDCs (central bank digital currencies). Aside from CBDCs being a useful counterbalance to the influence of crypto-currencies, Central Banks argue these digital iterations of fiat cash could also be used to expedite the trade settlement process in securities markets. If adopted wisely, CBDCs could result in instant settlements becoming reality – in what would net investors huge operational synergies through margin savings and collateral optimisation.
Similarly, a number of markets (i.e . the EU) have also said that security tokens – principally digital tokens representing tangible assets - will be subject to existing securities laws. This clarity from regulators could help drive liquidity into the (presently very thinly traded) security token market, potentially opening up new sources of returns for fund managers.
While regulators may have their doubts about crypto-currencies, they are more bullish on security tokens and CBDCs, a development which could be to the asset management industry’s advantage.
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