Regulatory development and institutional buy-in are market tailwinds.
There have been many pieces to the ‘Crypto Winter’ and the downturn in valuations, but two recent developments suggest the nascent asset class is here to stay. First, in August 2022, a bipartisan group of U.S. Senators proposed federal legislation to regulate digital commodities. And Coinbase, the U.S. crypto exchange, partnered with BlackRock to provide the asset manager’s institutional clients with direct access to crypto.
In the U.S., digital assets are currently governed by a patchwork of regulations at the state level, which can allow for gaps when it comes to protecting consumers from fraud. The Digital Commodities Consumer Protection Act of 2022 would give the Commodity Futures Trading Commission exclusive jurisdiction over the digital commodities spot market, which senators anticipate will lead to more safeguards for consumers, market integrity and innovation.
Crypto market participants welcomed the Act for providing clear federal oversight of digital asset commodity markets. Sam Bankman-Fried, Chief Executive Officer of FTX, said the crypto venue would find the regime - that brings comprehensive customer protections and oversight to spot crypto commodity markets in the U.S. – both constructive and prosperous. Likewise, Faryar Shirzad, Chief Policy Officer at Coinbase, emphasized a federal regulatory regime for crypto is a big deal. It ensures the U.S. will keep up with crypto policy in other jurisdictions.
According to a recent webinar jointly hosted by Regulation Asia and Nasdaq, Hong Kong and Singapore have taken the lead in building regulatory frameworks required for resilience and trust in crypto markets. The Hong Kong Government has included amendments to its Anti-Money Laundering and Counter-Terrorist Financing Ordinance, which include a new licensing regime for Virtual Asset Service Providers (VASPs). In Hong Kong, “virtual assets” apply to Bitcoin and other altcoins, as well as stablecoins and specific governance tokens.
Angelina Kwan, Chief Executive Officer at Stratford Finance Ltd., said, “All the existing guidelines for other financial institutions – internal control guidelines, fund-management code of conduct, regulation of automated trading services – will apply to virtual asset license holders.”
Singapore is also preparing its own legislation in a new Financial Services and Markets Bill. Janice Goh, a Partner at Cavenagh Law LLP, an alliance with Clifford Chance in Singapore, emphasized, “There’s a gap in the sense that the Payment Services Act does not regulate providers who set up shop in Singapore but do not offer services in Singapore. The new Act will require all VASPs with a place of business in Singapore to be licensed.”
An investor in Singapore also successfully appealed to the courts to freeze the transfer of a non-fungible token (NFT). Goh said, “It’s a first in Singapore and Asia and the first globally in the context of a commercial dispute where it recognizes an NFT as an asset.”
Regulatory frameworks are necessary to gain the confidence of institutional investors in the new asset class. David Kwan, Head of Sales and Business Development for Asia-Pacific at Nasdaq Market Surveillance, noted, “Numerous large institutional banks and investment firms have been preparing for this development for a very long time. When these kinds of regulations come in, we will see an increasing number of market participants and crypto markets mature.”
Kwan then discussed how the crypto sector could learn lessons from traditional capital markets, such as their tried-and-tested risk models and controls to protect investors.
“Maybe there are changes that we need to apply specifically for crypto assets, but ultimately, when it comes to investors, they want the same protections no matter which asset class they’re trading,” Kwan added. “They want to ensure that when they invest in something, market integrity is there, and this will only help to get more institutional adoption.”
According to the webcast, about 6.5% of all Bitcoin was held by institutions in June 2022 - up from zero a few years ago. Continued institutional demand was highlighted by Coinbase partnering with BlackRock to give institutional clients of Aladdin, the asset manager’s end-to-end investment management platform, direct access to crypto, starting with bitcoin. Coinbase Prime will provide crypto trading, custody, prime brokerage and reporting capabilities to Aladdin’s institutional clients, who are also clients of Coinbase.
Joseph Chalom, Global Head of Strategic Ecosystem Partnerships at BlackRock, said, “Our institutional clients are increasingly interested in gaining exposure to digital asset markets and are focused on how to efficiently manage the operational lifecycle of these assets.”
We may be experiencing a ‘Crypto Winter,’ but as the poet, Percy Bysshe Shelley, wrote in his ‘Ode to the West Wind,’ “If Winter comes, can Spring be far behind?”
For more on market surveillance, please check out a recent webinar jointly hosted by Regulation Asia and Nasdaq and Nasdaq MarketInsite’s article, “The Role of Market Surveillance: Building Trust in Crypto Markets.”
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.