As with any new innovation, it takes some time before incumbents fully embrace the change. The same is true for cryptocurrencies. Just a few years ago, early adopters made headlines as young, tech-savvy amateur investors got rich overnight. Today, with the influx of easy-to-use cryptocurrency trading apps, and even the adoption of digital currencies by governments, it is now on the cusp of mainstream adoption.
Surprisingly, although some traditional investors have been experimenting with the capabilities of crypto, the vast majority of them are still apprehensive. But what is causing this reluctance and how can we remove these barriers to achieve wider adoption by investment firms?
At the TNW 2021 conference, Fintech & Blockchain influencer Efi Pylarinou interviewed a panel of experts on what needs to happen before traditional investors embrace cryptocurrency as an investment strategy. This is what we discovered.
It’s time for the organizers to catch up
One of the biggest insecurities for traditional investors when it comes to crypto adoption is that laws and regulations simply haven’t adapted to the fast-moving popularity of cryptocurrencies.
“Trade certainty is required through international adoption of laws. This includes a common law legal agreement and regulatory transparency about how things work,” says Ali Hassan, senior representative for Europe and North America at the DIFC Authority.
The Dubai International Financial Center is the largest international financial center in the Middle East and Central Asia region with more than 3,000 companies operating from the center. Its innovation ecosystem includes more than 450 technology companies including a growing blockchain community.
Hassan explains that the market opportunity in crypto assets should be more visible to investors with appropriate safeguards in place so that appropriate investment decisions can be made. Therefore, the organizers need to step in to provide more certainty and transparency to the participants.
For example, the Dubai Financial Services Authority (DFSA) (the independent regulator of financial services conducted in or from the DIFC) is looking at examples from the European Union, the United Kingdom, Japan and the United States who have ventured into crypto to obtain security tokens ( backed by real assets). There are instructions for keeping, trading alternatives, operating the exchange, and how to handle customer orders.
Christopher May, co-founder and co-CEO of Finoa, agrees that institutional investors in the space are looking for technical security and regulatory certainty. In terms of technical security, Finoa provides a platform for over-the-counter trading in order to provide a secure environment to help realize the full potential of the crypto environment.
Describing the crypto environment, May explains that German regulators have a lot of confidence and laws in place to help institutional investors become familiar with and comfortable in the space. However, a lot of guardianship related processes still need to mature.
For example, security modules in terms of multi-party accounts, multi-factor authentication requirements, approvals for transactions over €10,000 or €50,000, etc. Of course, as transaction volume grows, compliance protocols need to emulate those traditional financial services models to make Institutional investors feel more secure and comfortable.
Cryptocurrency adoption needs to go beyond regulation
“Apart from these structures, there must be a paradigm shift,” says Lex Sokolin, chief economist and co-chair of Global Fintech for ConsenSys. Consensys is a software company that enables people to use Web 3.0.
They pointed out that encryption means encryption. One of their products is Metamask, a cryptocurrency wallet that contains not only financial users but also media and entertainment, NFTs, gaming, etc. to name a few. Sokolin insists that crypto is not just an asset class but also a platform for user-generated content.
Millions of tokens are issued every day on the blockchain and in virtual worlds. Similar to writing emails, tokens and digital assets have this path in terms of volume. Computational blockchains enable and build communities, transactions. Therefore, what drives money into space is not a functional permission, but fundamental innovation and value expansion.
Using an analogy, Sokolin points out that when the email started, there were a lot of scams but we didn’t finish blocking it due to viruses and trojans. What resulted from this is a spam filter that learns every time you move an email to spam. So, the main and real challenge is the mental shift that has to happen before institutional investors can inject money into cryptocurrencies.
You need to tackle scams
On the topic of cryptocurrency scams, Hassan shares that security token offerings (STOs), a type of public offering that includes tokenized digital securities, known as security tokens, that are sold on cryptocurrency exchanges, or security token exchanges, are important. crypto boom. To stem STO fraud, the DFSA has instituted a security token system that includes due diligence for issuers and a requirement for appropriate disclosures, for example, through a prospectus-type document.
This is especially important to enable emerging markets to reap the potential benefits of cryptocurrencies. Pylarinou expands by saying that in underserved emerging markets, people are being innovative in using crypto technologies, not for money laundering or tax evasion, but because they offer new opportunities. In this scenario, we need to go from the premise of knowing your customer, to knowing the basis of your transaction because people need access.
We need to combine the best of both worlds
To balance the speed of crypto innovation with the safety of traditionally slow financial services, May believes we need to combine the best of both worlds. A new and innovative ecosystem is needed to provide customer access to trade in DEX for customers who find existing DEX too complex to handle.
In order to enable institutional investors to participate in decentralized finance, you have to take some of the elements that people are accustomed to and combine them with the current innovative elements of cryptocurrency. This is part regulation and part consumer protection, similar to what the Internet has done in two industries.
Turbulence will always lead to uncertainty but it does not mean the end. Metallica sued Napster in the early 2000s and won. But it hasn’t stopped the music industry from moving from a closed ecosystem to an open digital one. Likewise, China has banned Google and Facebook, but users have found a way to get around that via VPN.
Sokolin believes that the current Chinese ban on cryptocurrency is not strong enough to stop the space. But it is important to know what the United States will do because its political position in the first place is somewhat puzzling. Regulation may slow progress, but it will not change basic design assets.
Taking old principles into a new ecosystem
Hassan thinks the Napster analogy is quite similar to what is currently happening in the crypto space. The ecosystem is new and the jurisdiction is new, but challenges occur when there is trading. Issues related to price discovery and post-trade transparency need to be resolved, and standards for behavior and accountability need to be established.
For example, how do you know who offers the most fair price for bitcoin? For this, we may need to take principles from the old world and apply them to the new world. There are fiduciary responsibilities for institutional investors because at the end of every investment chain, there is a retail investor.
Hassan also reveals that the DIFC is currently working on a crypto regulatory regime that will be published around December 2021.
In short, there are a host of regulatory and technical elements that need to be resolved for institutional investors to join in, but we are seeing positive movement in this area by various regulators and technology solution providers.