As the digital asset space transforms from a niche market into an alternative asset class involving a variety of players, headline-grabbing failures such as FTX, Three Arrows Capital, Voyager Digital and now BlockFi have negatively impacted public perception of the industry, which is driving the need for secure and regulated solutions.
In 2021, institutional interest in crypto skyrocketed. Institutional clients — mostly hedge funds, registered investment advisors, and some corporations — traded $1.14 trillion in cryptocurrencies on Coinbase alone, up from $120 billion a year earlier. This year the industry has come down from those lofty heights and as the industry grapples with the reality of what is happening, it is more important than ever to define a fit for purpose regulatory framework for digital assets. It is also incumbent on institutions to work with partners who adhere to best practices at the highest level, such as B. Sound compliance standards, a high level of good governance and managerial competence that includes a strong risk management culture.
Looking at the Asia Pacific (APAC) region, we have a mixed bag of institutional interest. Vietnam tops the list of countries in Southeast Asia adopting crypto the fastest, but its government is yet to recognize cryptocurrencies as legal tender. Therefore, financial institutions are completely prohibited from handling them there.
At the other end of the spectrum, we see jurisdictions like Hong Kong and Singapore making vigorous attempts to create regulatory frameworks designed to ensure crypto can safely take its place in the financial sector. Countries like Japan have a legal framework for stablecoins, while other countries like Australia and India are clarifying tax issues related to crypto investments – an important step in ensuring crypto’s legitimacy in the financial system.
Accenture research shows that more than half of wealthy individuals in Asia hold crypto in their portfolios, but two-thirds of wealth management firms in Asia have no plans to offer any form of digital asset offerings — and those that do are targeting crypto By and large, just depend on the safekeeping of digital assets.
It is our shared hope that regulatory changes in Hong Kong and Singapore act as a spur to institutional interest in crypto across APAC. But it’s also important to look at what some barriers to adoption have been to date.
The Image of Crypto and Security Concerns
A lack of clarity around regulations as well as asset safety concerns are the main culprits, but things are starting to change.
Regulatory clarity is critical to the development of any financial market, and this is especially true for crypto. With a strict licensing process for Virtual Asset Service Providers (VASPs), countries like Singapore can be considered at the forefront of crypto regulation. Businesses involving crypto are generally covered by the Payment Services Act, a consumer protection law that regulates payment systems in Singapore.
Singapore also passed the Financial Services and Markets Bill, which will refine the requirements of crypto and other financial services regulations. Additionally, Hong Kong is aiming to potentially allow retail investors to invest in crypto, provided robust guard rails are in place.
The combination of emerging regulatory clarity and open, constructive dialogue between different stakeholders in countries like Hong Kong and Singapore will hopefully give institutions more confidence in this asset class. More importantly, clues as to how digital assets will be treated in Hong Kong and Singapore – both of which are undergoing consultation processes with outcomes expected later this year – will hopefully encourage other Asian countries to follow suit.
As for the security of assets, we believe that these can be mitigated when institutions work with regulated digital asset platforms that use proprietary technologies to securely store digital assets and use a custody exchange network framework that ensures customer funds are never mixed up. When institutions partner with secure, compliant crypto custodians, trust in the sector will grow.
The potential of blockchain technology
Aside from crypto as an asset, we actively encourage institutions to open their eyes to the immense potential of blockchain technology – the technology powering crypto – as a conduit for the next wave of financial innovation. Blockchain can help solve long-standing problems in the financial system such as counterfeiting, double spending, and delivery failures. It can also streamline and make more cost-effective functions such as borrowing and originating, collateral management, and billing.
Beyond cryptocurrencies, blockchain technology will bring about nothing less than a change in the way we handle money, but it will require a great concerted effort from the financial sector to build the future rails for the financial industry.
The challenge is that traditional financial institutions are not technology companies. Although there have been many innovations over the past few decades, bank transfers and other back-office functions still work behind the scenes as they did in the past. This is largely intentional to maintain operational stability and security – but it explains why these institutions are slow and cautious when it comes to building new technology.
To realize the potential of blockchain while maintaining market stability, financial institutions need to partner with technology companies that have expertise in the fast-moving space of digital assets and the regulatory structure that institutions need for their own compliance.
A vision for the future
Having a secure, compliant method that allows wealth managers to integrate crypto as an investment product and blockchain technology into their portfolios as today’s top-performing assets is an important step. As important as it is for the industry to learn from the lessons of 2022, institutions should also not be distracted from the opportunities that blockchain technology and crypto can be a catalyst for. Therefore, there is an urgent need for all stakeholders to work together on a vision of a shared financial future, while proactively taking appropriate safeguards so that what happened in 2022 can never happen again.
After all, it’s not just about institutions enjoying the benefits of blockchain technology and investing in crypto and digital assets. Blockchain innovations can also help empower people in their daily lives.
Looking back over the past 20 years, it’s hard to imagine the impact the internet and smartphones have had on everyday life. Today almost everyone would be lost without these vital tools. Similarly, blockchain technology and cryptocurrency have the potential to transform the financial system with greater transparency and accountability, not to mention operational efficiencies resulting in cost savings that can be passed on to end users. We believe that blockchain technology will also be the catalyst for a more inclusive financial system that removes the barriers for today’s unbanked people to participate in and benefit from financial services.
Consumers in Asia are clearly receptive to crypto adoption, as evidenced by the Asian market, which accounts for 43% of global cryptocurrency activity, with $296 billion in transactions from June 2020 to June 2021.
With the industry potentially receiving clearer regulatory paths and the technology in place for institutions to protect their digital assets, it is only a matter of time before a fast-growing segment of institutional players in Asia become full-fledged participants in the blockchain economy.
This opinion piece is for informational purposes only. It is not to be construed as, and does not constitute, an offer to sell or a solicitation of an offer to purchase any securities of Anchor Labs, Inc. or any of its subsidiaries and should not be relied upon in making any investment decision. Additionally, nothing in this article is intended to provide tax, legal, or investment advice, and its content should not be construed as a recommendation to buy, sell, or hold any security or digital asset, or to engage in any transaction therewith.