With supply chain problems persisting and the US dollar struggling to cope with inflation fears, cryptocurrency remains an attractive outlet in the current financial storm. The recent approval of the first Bitcoin (BTC)-linked Exchange Traded Fund (ETF) to trade on both the New York Stock Exchange and Nasdaq from asset managers ProShares and Valkyrie Funds, respectively, has created a whole new class of financial instruments, sparking excitement in the markets. Valkyrie received explicit approval from the US Securities and Exchange Commission (SEC), while ProShares simply did not oppose the ETF.
This marks a big year for institutional funding interest in cryptocurrencies. There was a massive $64 billion Nasdaq direct listing from Coinbase, while big-time venture capitalists (-IPOs) like Andreessen Horowitz (a16z) launched their own multi-billion dollar funds focused exclusively on cryptocurrencies.
Financial excitement isn’t just limited to the biggest names in the industry. Cryptocurrency-related startups are reported to have raised more than $2.6 billion in the first quarter of 2021, which is more than they raised in the whole of 2020.
For cryptocurrency to truly be a serious investment vehicle that stands up to competition, rather than just a passing fad equivalent to the 21st century gold rush or tulip mania, it must secure long-term support from institutional funding as a serious investment alternative.
Easier said than done. So, how does encryption work?
Related: why now? It took the SEC eight years to license a Bitcoin ETF in the US
Get down from your walls and open the gate
Crypto has already proven that it can produce staggering returns in triple digit percentages, but these massive fluctuations in value only reinforce its perception as the “wild west” of finance. Cryptocurrencies will only become a fully mature investment alternative when they reach near-unanimous confidence in both their stability and transparency.
Several stakeholders and regulators in the new crypto economy have expressed some skepticism. Gary Gensler, president of the Securities and Exchange Commission, one of the largest US watchdogs, said he still had concerns about protecting investors in the $2.5 trillion crypto-asset market. As Gensler himself said at Yahoo Finance’s All Markets Summit last month:
“Investors are not as protected as they are, whether they go to the stock markets or the bond markets that we have been pointing at for so long. Without that, I think it really is, as I have said to others, part of the Wild West.”
The speculative nature of the market, combined with inadequate supervision, creates this perception of a risky environment. For a certain type of investor, this sense of excitement and risk is almost welcome — “work” one day and buy the dip the next — but it’s not a recipe for attracting significant institutional funding, let alone those managing retirement plans or 401(k)w.
The big companies in the cryptocurrency industry sure know this and are already trying to create standards that will make everyone from big money to small retail investors more comfortable with crypto as an investment alternative. In a report to the US Senate Banking Committee, the above-mentioned A16Z outlined principles of industry regulation that included:
It shouldn’t be lost on anyone looking at the a16z report that it was not only submitted to a government body, but included solutions that would be impossible to implement without government cooperation. Libertarians and crypto anarchists may scoff, but for cryptocurrency to reach its full investment potential, such cooperation between governments, major financial institutions, major crypto institutions and retail crypto investors is essential.
Related: Things to know (and fear) about the IRS’ new crypto tax reports
I’m sorry sir, but we should have some law
As much as Bitcoin was initially designed as a way to circumvent central banks and manipulate currency, government registration (and purchase of) cryptocurrency in the form of regulation will still be necessary to create global legitimacy and the resulting investment, even if these cryptocurrencies and the investment vehicles themselves are nominally “decentralized.”
It is best for the industry to be proactive in this regard, not only in policing itself but also in deciding how to regulate crypto by federal lawmakers who may not be more familiar or knowledgeable about cryptocurrencies. Currently, the US is in the process of passing an infrastructure bill that threatens cryptocurrencies with vague language and misplaced priorities. Companies like Coinbase and a16z have worked tirelessly to make sure that crypto interests (and their own) are realigned on the bill, but only a few large companies can do so much. It would take an effort by the entire industry to welcome this regulation, the rational regulation.
Related: US Infrastructure Law Could Support Digital Assets – But First Some Fixes
As bad as some of the infrastructure bill’s cryptographic provisions are, if it goes into effect, some benefits could come from it as well. These new crypto provisions open the door for many crypto companies to have a solid foundation when dealing with banks according to the rules, rather than being banned or unable to open accounts. Its distinctive language also allows for serious integration of cryptocurrencies with the largest banks in the country, opening up whole new classes of investors and significantly increasing market capitalization.
Foreign governments like the United States might also offer a blueprint for what rational pro-crypto regulation looks like. Canada’s quick and clear but also encouraging regulations have allowed crypto-traded funds to almost completely control the fledgling ETF industry in Canada.
As the old cliché says, the first step in solving a problem is acknowledging its existence. The cryptocurrency industry as a whole needs to recognize the long-term issues inherent in the current lack of regulation and find ways to work with legislators and regulators to protect consumers without weakening the very strong value propositions that attracted investors to cryptocurrencies in the first place.
The opinions, ideas, and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
James Giancotti He is the co-founder and CEO of Oddup, a global platform for rating startups. He began his consulting career at Deloitte before moving on to investment banking and research roles at Goldman Sachs and JP Morgan. After advising high-growth companies for a decade, he turned to the investor and entrepreneur. He currently manages dual roles as CEO of Oddup and Alluva, the largest global market analyst for crypto assets.