The last 18 months have been quite the ride for the cryptomarkets. From the wild run-up to their all-time peak value in January 2018, to the crash and bounce pattern in the first half of 2018, to the slower, steadier decline since then, the cryptocurrencies have been predictable in their unpredictability. The charts and data at Coinwatch.com tell the story, in all its gory details.
Just reading this tale of decline doesn’t necessarily lead to a grim outlook for the future. Nasdaq CEO Adena Friedman, writing last month, said that the crypto trading market “deserves an opportunity to find a sustainable future in our economy.” She may be right; but let’s first assess some of the conflicting currents that the market will face in coming months.
The biggest negative factor facing the cryptomarkets lies in the very nature of cryptocurrency. Cryptos are not physical products. They do not produce any service or pay out any dividend for investors. Buying more will not boost employment. They are the purest speculative instrument in the financial trading world; they can only generate a return for someone if they can be sold again, and at a higher price.
Such a purely speculative trading asset is almost guaranteed to bring the notice of government regulatory types, at least eventually, and a major recent development bears this out. In January, the US Securities and Exchange Commission – which has regulatory oversight powers in the financial sector – issued a new guidance report that prioritizes cryptocurrencies.
The “2019 Examination Priorities” report was put out by the Office of Compliance Inspections and Examinations, and specifically notes that digital assets pose risks for investors. On page 11, the report clearly states:
“Given the significant growth and risks presented in this market, OCIE will continue to monitor the offer and sale, trading, and management of digital assets, and where the products are securities, examine for regulatory compliance.”
So it would seem that crypto’s days of avoiding the bureaucrat’s gaze are coming to an end. Going back to Adena Friedman’s comments, such oversight is “antithetical to the original intent [of] a decentralized, ungovernable global currency.” As she points out, however, “governance and regulatory clarity” may also be indispensable for crypto to move forward.
And crypto is sure to move forward. Travis Scher, a VP with Digital Currency Group, sees regulation as both a hot-button topic and a potential benefit for the digital trading markets. “Regulation is the most important topic in crypto today. How regulators decide to treat cryptoassets and crypto companies will be a huge determinant of this industry’s success.”
Regulation, however, while proceeding, is not proceeding at the same pace or to the same extent in every jurisdiction. Some countries, such as Denmark and Mexico, are still treating crypto as an unregulated asset, while in Germany and Japan the regulators are starting to apply the same standards that are used for monetary transactions. In the US, the absence of Federal enforcement – for the time being – leaves the matter at the state level. Oddly enough, it is Wyoming that is taking a lead on this issue.
On January 18, the Wyoming legislature passed a bill that would place crypto assets into the same categories as other digital assets: digital consumer assets, digital securities, and virtual currency. Under Wyoming law, assets in those categories are considered “intangible personal property,” and regulated in the same way as fiat currency.
Wyoming’s bill will go into effect on March 1. In an interesting twist, Wyoming’s action might help push other states in the same direction; the US Constitution includes a provision that “Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State.” In practice, this generally means that interstate financial and commercial regulations tend toward uniformity.
While regulation may pull both ways for crypto, the underlying blockchain technology is an undisputed strength for the trading markets. Blockchain, while a physically intangible digital construct, brings a level of security and reliability to the online transaction process. It has the potential to change the way that industries conduct their business, especially in fields like banking or supply chain management. Any transaction that depends on an accurate and rapid transfer of information can benefit from blockchain.
Getting the Big Money
Speculation, regulation, and secure transaction may all pale in comparison with the biggest possible change to the crypto markets: an influx of institutional money. While most of the large financial institutions have been keeping back from crypto, Fidelity Investments is moving toward a crypto asset offer.
In October, Fidelity unveiled Fidelity Digital Assets, making it Wall Street’s first major firm to put a hand in cryptocurrency trading and investment. And it is quite a hand – Fidelity has arrangements with over 13,000 other financial institutions, has 27 million customers, and oversees more than $7 trillion in total assets. This is the sort of institutional money and approval that crypto will need to survive the current falling prices.
By opening a crypto platform, Fidelity put an institutional stamp of approval on cryptocurrencies, effectively making them a new asset class. Fidelity’s CEO, Abigail Johnson, says so bluntly when describing the company’s Digital Assets program: “Our goal is to make digitally-native assets, such as bitcoin, more accessible to investors. We expect to continue investing and experimenting, over the long-term, with ways to make this emerging asset class easier for our clients to understand and use.”
The Last Word
The cryptocurrency market is at a crossroads. Traders – and investors – in crypto will have to navigate a confusing and evolving network of emerging government regulation and institutional investing initiatives, while building on the strength of blockchain and avoiding the pitfalls of speculative finance. Whatever happens, it is sure to be something new under the sun.
We quoted Digital Currency Group’s Travis Scher above, on the subject of regulation. We’ll give him the last word here, on the future: “2019 will be volatile, entertaining, and full of surprises. But I am confident that the stress caused by the 2018 crash will lead to more growth.”
Author: Michael Marcus