[ I N - D E P T H |
C R Y P T O C U R R E N C Y
There are multiple other reasons
outside of custody institutional investors
have held back from trading cryptocur-
rencies so far. Trading of the digital assets
remains unregulated, while questions
remain over liquidity, transparency and
valuation. Links to criminal activity and
money laundering also do cryptocurren-
cies no favours when attracting the most
heavily scrutinised parts of the financial
sector either. Perhaps crypto’s most
notorious personality trait in the past 12
months has been its volatility, which has
attracted many new funds to the space,
but few established ones.
Custody not the only issue
“There is little participation from insti-
tutional investors, but it is liquid enough
to trade,” said Peter Kambolin, chief
executive officer at Systematic Alpha
Management.
“If you look at the incredible volatility
that all cryptocurrencies are having, it is
telling you that investors don’t know how
to value them.”
“Putting a value on where bitcoin is
supposed to trade is difficult, some people
think it is zero and others think it is
worth one million in the future.”
Despite the lingering worries, the lure
of this volatile new product could be too
much for the buy-side to resist for much
longer. One hedge fund trader who pre-
ferred to remain anonymous commented
that “at this point, we’d rather be involved
and stay small rather than not be involved
at all”.
Another source explains that members
of major buy-side firms are instead using
their expertise on the side, by trading
the unregulated markets on personal
accounts outside of their day jobs.
In a chicken and egg scenario, institu-
tional investors are waiting for volatility
to steady, but it is the arrival of institu-
tional investors which could steady the
price swings. Perhaps the arrival of cus-
todians on the scene could open the gates
for them despite the volatility.
Regulatory domino effect
Earlier this year, Richard Turnill, Black-
Rock’s global chief investment strategist,
said in a note that trading “should only
be considered by those who can stomach
potentially complete losses”. He added
that their volatility made market turbu-
lence during the financial crisis almost
look placid.
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Global Custodian
Summer 2018
C U S T O D Y ]
“We don’t want to get this
wrong, if one thing goes
wrong then the confidence
will be dented.”
TEANA BAKER-TAYLOR, CMO, COINFLOOR
“Institutional money brings greater vol-
ume, for institutions to be able to invest
more regularly – if you are a non-regu-
lated entity like a hedge fund or family
office, you may already be in the space –
regulated institutions like trading desks at
major banks need a regulatory framework
and you need to understand how those
assets are held from a custody side and
how they are going to hold it on a balance
sheet.”
Regulation is possibly the other issue
that matches security as holding the key
to more institutional investment.
“Why isn’t institutional investor money
flying into this space? It’s regulatory
issues,” said Achim Illner, CEO at Global
Crypto One.
Again, this comes back to a lack of
custodians providing services for cryp-
tocurrencies, which was one of the main
reasons behind US regulators quashing
applications to launch Bitcoin ETFs in
January this year.
The Securities and Exchange Com-
mission (SEC) issued a letter asking for
firms to withdraw requests to launch the
products until multiple issues had been
resolved.
The SEC’s concerns focused largely on
investor protection issues.
“To the extent a fund plans to hold cryp-
tocurrency directly, how would it satisfy
the custody requirements of the 1940 Act
and relevant rules?” the SEC asked in a
letter to the Investment Company Insti-
tute and Securities Industry and Financial
Markets Association, back in January this
year.
Each country’s national regulator has a
st