What Will It Take to Institutionalize Crypto Assets?
By Lihan Hyunwoo Lee, CTO / Co-Founder and Xangle
Crypto may not yet be considered an institutionalized asset class — but it’s getting closer.
The truth is, it’s already happening. Early investors in crypto kept it afloat after a rocky start, and are now realizing returns that seem on an infinite upward trajectory. We’re now seeing the value diverse crypto assets can bring as start-ups turn away from traditional VC funding, instead issuing tokens that give investors a variety of rights, privileges and most importantly, access. Cryptocurrencies are being adopted worldwide, and the secure, transparent blockchain technology at crypto’s core is being implemented in both new and old industries.
But despite all that crypto can offer, it hasn't yet scaled into a recognized and trusted asset class, with the support of institutional investors, established exchanges, standards for disclosures and information transparency, and a set of regulations. Part of crypto’s hindrance is due to factors like continued high volatility, high transaction or gas costs, slow block processing, and lack of usability.
But no one can argue that the proof of concept isn't there. Crypto and blockchain technology promise new, frictionless ways to approach data transparency, as well as new methods of creating value through decentralized global networks. Bitcoin, for instance, offers new ways to exchange currency and new hope for the global unbanked. Ethereum shows a concept of smart contracts secured by blockchain technology that can run automatically. Blockchain itself offers data insight that could benefit nearly every industry, from banking to healthcare to energy.
The exciting thing is that we’re past crypto’s initial creation, and in many ways past early adoption. But the benefits of crypto won’t be fully realized until it’s institutionalized — but there are things the industry needs to do to get it there.
The Benefits of Crypto Institutionalization — a Rising Tide Lifts All Ships
Crypto isn’t going to become an institutionalized asset class on its own. It’s going to require investors, infrastructure, clear global regulations, and more wide-spread adoption — which will only be a good thing. The term "A rising tide lifts all ships" would apply here, as a greater recognition of crypto as a legitimate asset class, more investor-backed crypto projects and token offerings, and greater awareness around crypto can only benefit all players.
Here are some ways crypto as an institutionalized asset class will benefit all.
More Trust and Stability
As crypto assets attract bigger, more professional investors with more capital, it will only make markets more advanced. Increased data disclosures will help markets function more efficiently by correcting information asymmetry in the growing asset class as well. With increased investment in crypto will come increased liquidity, which will improve volatility and stabilize the swings in coin price. As trust and investment in crypto grows, it’s only going to help crypto get closer to institutionalization.
Recognition as a New Financial Sector
Additionally, as the recognition of crypto as a valid asset class grows, so will the need for a financial sector around it, including crypto-specific exchanges, brokerages, payment providers, fintech innovation, research and analysis groups, and even insurance, investment, and accounting services. These offerings will not only fill a new demand, but will lend legitimacy to the crypto assets they serve, bringing increased investment and awareness, which will feed back into the cycle.
Regulations and Disclosures to Create a More Fair Market
Institutionalization of crypto will also depend on setting up industry standards like regulations, security controls, legal structures, and widespread information disclosure in order to continue to build a culture of trust and parity. Right now, data is dispersed and hard to find. It’s an unfair market situation where insiders get the information first and make their trades in advance. But a few improvements in disclosure practices can create knowledge, eager investors.
Widespread Adoption and Awareness
Finally, adoption of blockchain technology and alternative funding options through token offerings will cause a growth of the crypto ecosystem, and a recognition that crypto can be used in different, beneficial applications across different industries. This kind of wider-spread adoption will also grow the awareness, trust, and commitment needed for institutionalization. Many traditional companies and financial institutions are careful to work with the crypto ecosystem directly. Institutionalization and proper regulation will change the sentiment
The Challenges to Getting There — and Their Solutions
The benefits in getting crypto to institutionalized status will be not only just for markets and investors, but for industry growth in general. We’re not there quite yet, but the few challenges in the way are easy to overcome:
First, technological improvements still need to be made within the crypto ecosystem, especially around processing speed, efficiency, and scalability, which have been the challenges to widespread adoption for a while. But new solutions, like on-chain scaling are being implemented every day.
Because crypto functions in a deregulated ecosystem independent of financial institutions and governments, it’s tended to avoid any rules and standards. But regulations around disclosures and information transparency would only help the ecosystem grow, and provide confidence to investors and transparency to the market. They just need to be defined, codified, and adopted.
Additionally, there's also a lack of services and products offered around crypto assets, like exchanges, brokerages, and fintech innovation. But a growth in these service and product providers would go a long way to legitimizing and institutionalizing crypto.
Since the early days of crypto, the general public has often associated it with black market dealings or pyramid schemes, and there's still a lot of baseless public opinion around crypto. But public perception can be fixed with education, transparency, and greater visibility of crypto and blockchain technology in everyday life.
But the biggest way to move crypto towards institutionalization is by recognizing where it is in its maturity, and that it’s still growing and evolving. It would be unfair to compare crypto to a well-established traditional asset class, and these challenges are simply a byproduct of a young asset class that needs room to grow.
How can it grow quicker? If we see more investments, more information and transparency around new coins and projects, and more implementation of crypto and blockchain into a wider variety of industries, we’ll see crypto’s institutionalization happen in no time.
About the author
Lihan is a serial entrepreneur and technologist who solves real world problems with a data-oriented approach. He previously founded OpenSurvey, Korea's first and largest mobile survey startup. He was also the co-founder of a leading F&B startup that deals with sensitive medical data. His current passion is towards using data analytics to help solve the transparency issue that plagues the crypto industry
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.