2018: when institutional interest in digital assets reached a tipping point
As blockchain companies everywhere approach the final few months of the year, it’s seems like a good time to take stock on where we are — and what we’ve learned so far.
2018 may be remembered as the year in which institutional interest in crypto assets reached a tipping point — and then went on to reconfigure the world’s financial landscape.
While retail investment precipitated the vast majority of crypto growth thus far; institutional investment will undoubtedly power its next growth phase. Despite the headlines, even today such investment remains in its infancy. For adoption to proceed, a more secure, transparent and regulated industry is required.
It’s also to be hoped that 2018 marks the high waters of crypto risk — after which levels of hack attacks and exit scams subside.
While the crypto world is buffeted by these damaging storms on an almost-daily basis, such clouds may have a silver lining. The negative forces of fraud, theft and other crime may ultimately result in the introduction of the regulatory framework required for digital assets to truly realise their potential.
This will provide scant comfort to the many victims already created though it may at least ensure the industry learns from its mistakes and better protects its future.
The slow path to adoption
While the maturity of the crypto space remains incomplete, some progress is being made.
Blockchain-related topics have unmistakably crossed from the fringes into the mainstream. Such themes are in vogue at established (ie non-enthusiast) conferences and forums across the globe.
Many banks and exchanges have performed dramatic volte-faces. Instead of vociferously dismissing digital assets, they now rush to demonstrate that they too have a crypto strategy, with equal vociferousness.
Look deeper though and inertia remains.
There are many successful, long-standing and naturally conservative organisations that are still wary of entering the fray. Some will even continue to do so until their balance sheets depend on it.
At this stage of adoption, this is natural and unsurprising.
Navigating a virgin route through a territory of unfamiliar risk is quite reasonably anathema to many institutions. Fears are compounded by the lack of regulatory clarity required to guarantee safe passage for the funds under their purview.
Last week in crypto
Halloween week 2018 was relatively unremarkable for blockchain followers. However, last week’s events encapsulate the breadth of risk facing incoming investors of all shapes and sizes.
Last Sunday, we heard about the apparent hack of Maple Exchange.
It led to customer losses that were relatively small compared to others seen earlier in the year. However, each additional instance of such an event maintains a meta-narrative of uncertainty. It also further demonstrates the challenges involved in providing secure digital-trading platforms.
Given the potential rewards of such a hack, the number of potential targets (in an as-yet-unconsolidated marketplace) and the challenges of identifying and prosecuting perpetrators, would-be hackers continue to have little to lose but much to gain.
The perils of anonymity
On Monday, a different kind of crime was revealed by the CEO of Oyster Protocol ICO. A rogue director had somehow singlehandedly issued 3 million tokens and sold them at KuCoin exchange to realise profits of at least $300k.
It was unfortunate but inevitable to see the result of this “exit scam” was the price of the traded coin dropping from 0.23$ to a low of around 0.03$.
The alleged perpetrator remained anonymous to his fellow directors despite months of working together. For a project providing anonymised data storage, this is, in some ways, understandable.
To protect investors, oversight and accountability must be the norm, whether self-enforced or mandated. It is to the credit of the ICO — now renamed Opacity — that they are now embracing high standards of transparency in an effort to rebuild trust.
Exchange hacks and exit scams are preventable events. Better risk-management protocols and good models of corporate governance could, should and eventually will prevent them.
This is closer than it might appear. Ironically, it is likely the Oyster Protocol attack was brought about by KuCoin’s implementation of the very KYC controls that would have prevented such an occurrence from taking place.
For many, such controls can’t come soon enough. Indeed, the value of building a trusted corporate brand is increasingly recognised.
Last Tuesday, Binance’s move to freeze funds relating to the purportedly fraudulent WEX exchange and to “work with LE” is to be applauded. Such moves help provide the reassurance required to move the industry towards greater maturity.
Last Wednesday, we marked a decade since the publication of Satoshi Nakamoto’s original white paper .
The timing highlighted a central paradox of the situation we face today: future adoption requires the assimilation of regulatory frameworks that some oppose as the very antithesis of the underlying crypto philosophy.
The history of blockchain assets has been pockmarked by fraud and loss. As the Financial Action Task Force also said last week, this must not be true of its future.
Crime doesn’t pay
Cybercrime is far from limited to cryptocurrency. Some estimates put its cost as $600bn in 2017 alone. The world’s leading businesses and governments can attest to it having grown to become a major structural threat.
For a nascent crypto industry, such crime (and the continuing association with crime) causes an order of damage that is arguably beyond that suffered by other sectors.
Its continuing recurrence sends shock-waves beyond the victims directly impacted. It slows adoption and hinders growth.
Lurid headlines on such crime are well read and often easier to digest than more positive (and often technical) stories. Of course there’s still plenty of ammunition for the negative stories. This will continue to be the case until the industry tackles its shadow and faces up to the regulation it requires.
There was other news last week that didn’t make as much of a splash as those outlined above. Some of these less-glamorous stories tell how the nuts and bolts of institutional crypto technology are being assembled and readied.
For example, in Japan we heard of SBI’s extensive Ripple trial for R3. We also learned that Fujitsu would trial a blockchain-based interbank settlement system for nine banks. Such stories show real institutional adoption in progress .
While the current environment of adverse risk may hamper growth in the short term, it will have beneficial long-term effects — if it encourages responsible-but-coherent regulation.
We should all welcome and encourage this regulation — while doing our bit to ensure such regulation is both responsible and enabling. By doing so, we will help secure the future potential of the revolutionary technology that celebrated its first decade last week.
Want to read more?
Having mapped the main contours of the macro landscape awaiting institutional investors, our next article will look at some specific barriers to wider adoption. We will then move onto the opportunity for alternative data in digital asset trading and investment.
Forthcoming in this series:
· Institutional barriers to crypto investment
· The impending boom in alternative data for crypto investments
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