The Institutions Are Coming to Crypto
Institutions are coming to crypto?
After the spring doldrums the crypto market has woken up with prices of many cryptocurrencies rallying to fresh year highs and in the process generating high double-digit returns for investors who had faith that last year’s events were not, as the naysayers predicted, a crypto extinction event1. Reflecting this more optimistic assessment, the Trakx Top 10 Crypto CTI is up 43% since early January, with the Bitcoin/Ether CTI up an even more impressive 69%, indicative that the gains so far have been centred on the major tokens.
The catalyst for this latest leg up?
BlackRock’s decision to file an application for a spot Bitcoin ETF. Obviously, this is not the first time such a filing has been made. Grayscale (and others) previously tried to get approval for such a financial product, but they were repeatedly rejected by the SEC. However, given Black Rock’s tremendous record of getting SEC approval for its ETF products (575 – 1), there is widespread belief that the SEC will, finally, accept a spot Bitcoin ETF, something that help to bolster crypto adoption because it provides a way to bring new investors into the crypto space. Indeed, if successful, a BlackRock Bitcoin ETF could be very popular because according to comments posted on Twitter last week, CEO Larry Fink, stated that the Black Rock’s website had 600,000 hits for the word “Bitcoin” compared to only 3,000 for “monetary policy” – see below. Anecdotal evidence of just how crypto-curious investors are.
Source: twitter
It is not only Black Rock that has been putting the crypto market cliché that “bear markets are for building” into practice, numerous other large established financial players have done the same. Invesco and WisdomTree both decided to follow BlackRock’s lead and filed for spot Bitcoin ETFs in the US as did Ark Invest. Meanwhile, Citadel, Fidelity and Charles Schwab launched an institutional-only crypto exchange EDX last week. Although EDX will only offer trading in four cryptocurrencies – Bitcoin, Ethereum, Litecoin and Bitcoin Cash – combined with the aforementioned ETF filings, it confirmed what many crypto players have long anticipated... the institutions (finally) are coming.
Regulation First
What is aiding the institutional adoption of crypto is something that was always likely to happen in the aftermath of last year’s collapse of FTX. Crypto regulation is being strengthened and accelerated in many nation-states, providing much needed legal clarity for institutions who, conditioned to operate in regulated environments, have been reluctant to increase exposure to this new asset class because of the uncertainty.
In the UK, for example, the UK recently passed the Financial Services and Markets Bill 2023, legislation that amongst other things outlines regulations for crypto-assets, including stablecoins. According to the government, the legislation will help promote the use of new technology in financial services and support the safe adoption of crypto-assets. This follows in the footsteps of the EU, which is in the process of implementing MiCA legislation passed earlier this year.
The one rather obvious outlier to this rule-making regulatory approach is the US. So far at least, it has adopted a different regulation-by-enforcement approach that has come in for considerable criticism and not just from crypto industry insiders - reasons I outlined in a recently published research note2.
While the SEC approach may not be the best, the fact is regulation is needed in crypto if it is to become a more widely owned financial asset. Indeed, as I pointed out in a research note published last year3, because people feel more comfortable investing in something which is overseen by the government, regulation will be a critical catalyst for crypto to jump what PR teams call “The Chasm” and go mainstream.
Stylized Technology Adoption Curve
Source: Author
Not everyone within the crypto industry likes regulation (a mild understatement), and not everyone likes institutional adoption of crypto, but everyone wants broader crypto adoption. Perhaps it is time the crypto industry followed the sage advice of Messrs Mick Jagger and Keith Richards….
“You can't always get what you want,
You can't always get what you want,
You can't always get what you want,
But if you try sometimes, well, you might find You get what you need.”
- 1 See: https://trakx.io/interest-ing-times-part-i/
- 2 See: https://trakx.io/regulation-ramp-up/
- 3 See: https://trakx.io/roadmap-to-utopia/
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