The School of Crypto Finance: Barriers to Adoption – Tess Pawlisch
There’s finance. There’s crypto. But then there’s crypto finance. Have questions about institutional crypto finance but are too afraid to ask the sharks of the industry? We get it. That’s why Ditto has created a definitive ‘School of Crypto Finance’ guide. We’re here to make cryptocurrency understandable for everyone — from industry leaders with a question or two to beginners with a question or a hundred. Check back weekly for more content! There’s plenty more to come.
Overview
If you are reading through this guide, you know that cryptocurrency and blockchain technology could transform our financial systems and improve our industries. But just like any new technology, widespread adoption is a slow process. There are technological, legal, and philosophical barriers that any emerging product must address before they can go mainstream.
Below, we will address some of the most important barriers facing institutional investments in the industry.
The philosophy of Bitcoin
The underlying philosophy of Bitcoin is inherently libertarian: minimal state intervention and no taxes. It is decentralized and privatized. The very idea of having no central government to regulate currency isn’t going to fly with the majority of governments. While libertarian ideas are gaining traction in the United States, social democracy and strong government regulation of our financial systems have strong support in most areas of the world.
Too many types to choose from.
There are 2,000 different types of cryptocurrencies worth over $220 billion in the global economy. How do institutional investors know which cryptocurrencies are valuable? And on top of that, how do institutional players and governments go about regulating thousands of cryptocurrencies? That leads us to…
Regulation
Rules of institutional crypto are unclear, so traditional financial institutions on Wall Street have been reluctant to get in the game. Governments and global financial institutions have not been consistent in regulatory rules on how to keep up with blockchain technology while finding ways to protect investors.
The United States is attempting to set clear regulations, but there’s a lot of governmental agencies to navigate. The Securities and Exchange Commission (SEC) views most crypto-assets as securities. But not all. The Commodity Futures Trading Commission (CFTC) considers them a commodity. But not all of them. The Internal Revenue Service (IRS) view them as a property. But not all of them. That’s just way too confusing.
Criminal association is also responsible for scaring away institutions. Frankly, most people to this day learn about Bitcoin due to its association with the Silk Road — an online black market site used to sell illegal drugs, guns, and other goods. Moreover, crypto-jacking is becoming increasingly common. In the first quarter of 2019, $356 million was stolen by crypto hackers. It is estimated that in 2019 alone, $1.2 billion will be stolen online.
Market volatility
Even though problems faced in traditional financial systems are relatively similar to those being faced by crypto-exchanges, the very high volatility of cryptoassets has the potential to negatively affect perceptions.
Cryptocurrencies are attempts to address the volatility issue through the creation of “stable-coins” which are digital tokens with values connected to currencies like the USD. Tether is the most well-known example. Every USDT token issued is, in theory, backed by a US dollar deposited with a custodian by the private company. But, institutional investors are wary of trusting exchanges to guard their funds. Which leads us to…
Custodial issues
Institutions do not like the idea of giving custody of large amounts of cryptocurrency to exchanges, especially with the increasing numbers of hacks to big exchanges like Binance. They want to know how their funds are stored, secured and insured. They prefer regulated cold storage to reduce the risk of theft and loss.
Trading
Because the market is incredibly volatile, crypto exchanges suffer from serious liquidity issues. Right now, crypto is relatively illiquid, meaning institutional investors that often want to make a $100-$200 million exchange cannot make the trades they are accustomed to without distorting markets by creating huge price swings. Consequently, trading can take a lot longer than it would on a traditional exchange!
Why it matters
As you can see, cryptocurrency and blockchain are still a young technology, and it currently faces a lot of barriers to mainstream adoption. While these barriers are considerable, big financial institutions (like Fidelity) are already looking to get their feet wet. The world is taking notice of its potential.
That being said, it’s important to remember that while the industry is looking to solve the technological issues and stabilize the market, there is still the issue of Bitcoin’s libertarian underpinnings. Can, and will, the global financial system change its entire underlying philosophies and adopt libertarian ideals? How does one change the minds, cultural systems, and social/financial philosophies of the masses?
What people are saying
“Getting a global society to agree something has value and can be used as a currency without government support and without a physical form is one of the most significant accomplishments in monetary history.” Chris Burniske and Jack Tatar, Cryptoassets, 2017” — Chris Burniske and Jack Tatar, Cryptoassets, 2017
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Published at Wed, 10 Jul 2019 00:24:35 +0000