Regulatory clarity to boost institutional crypto investment in Asia

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As regulators seek to develop appropriate investor protections for digital assets, more traditional investors are turning to the asset class. Asia’s stature in the global crypto markets means that it will have a great influence in shaping a more institutional market, market figures said during a recent webinar hosted by The Block and sponsored by Eventus Systems.

Institutions such as pensions, endowments, family offices and even sovereign wealth funds are all studying the place of digital assets in their portfolios. This interest will change the market, the panelists said, as these investors looking for infrastructure and products that meet their needs for diversification and acceptable risk parameters emerge. In a recent report, “Overview of Digital Assets and Blockchain,” Goldman Sachs notes that over 40% of value transfer in crypto-assets takes place in Asia-Pacific and, according to a study by Chainalysis, the region will be at the top of the list. plan in forming adoption institutions globally. In the more mature markets of North America, Western Europe and East Asia, growing adoption has been driven largely by institutional investors, according to the study.

“While they are keen to participate in the crypto megatrend, the fund commitments and operational limitations of most institutions prevent them from directly accessing coins and tokens,” said James O’Brien, director of the operation at Valkyrie Investments. “Institutions are looking to a range of indirect approaches to access crypto performance, such as managed accounts, funds of funds, and private funds.”

“Many are drawn to exchange-traded funds, which separate the operational risk of crypto assets from their price performance,” added Vincent Turcotte, sales director for Asia-Pacific at Eventus. “The Undeliverable Futures (NDF) products developed by investment banks also promise to achieve this goal.” And as mature crypto service providers such as the Coinbase exchange go public, their actions represent a conventional and regulated avenue to access the growth of the crypto market.

Regulators are listening

The growing emphasis by regulators on market integrity and investor protection is driving changes on the part of crypto market players, Turcotte said. Recognizing the benefits of greater regulatory clarity for its business, crypto infrastructure provider FTX US has joined both the Futures Industry Association and the International Swaps and Derivatives Association (ISDA) – integrating it into the space of traditional finance or “trad fi” “, he declared. noted.

In turn, lawmakers and regulators are responding to the growing scale and increasingly mainstream status of crypto: Total market capitalization more than doubled in 2021 to $ 2.13 trillion. A Fidelity survey of global institutional investors in July this year found that more than half of global institutions are already investing in digital assets, while in Asia it was 71%.

And a clearer picture is starting to emerge of how crypto will be regulated in the region’s two main international financial centers: Hong Kong and Singapore. Hong Kong is expected to introduce legislation bringing all cryptocurrency exchange licenses under its Securities and Futures Commission (SFC) – likely limiting access to professional investors – while the Monetary Authority of Singapore (MAS) has started to license exchange operators under the country’s payment services law.

Cooperation between crypto players and regulators does more than spur new regulation. “The introduction of regulated products to the US market has been educational for product developers and regulators,” said O’Brien. “This stimulates more innovation which gives legal status to tokenized assets.”

As crypto becomes more and more regulated, more conventional client suitability rules come into play, ensuring that investors who enjoy the higher leverage inherent in many crypto derivatives have the sophistication and capabilities. resources needed. “The regulations will also clarify anti-money laundering (AML) and know your customer (KYC) requirements,” said Turcotte. “This allows institutions to quantify and account for these risks. “

Investor behavior

As the crypto markets attract a wider range of investors, the market is dividing. “In the case of family offices, smaller players led by first- or second-generation directors are aggressive return seekers,” said Gerald Goh, co-founder and CEO of Signum Singapore, a digital asset specialist with a banking license in Switzerland. and an asset management license in Singapore. “But others follow institutional lines with a separation of responsibilities with an investment committee more likely to implement funds with a buy and hold approach.”

“While individuals seeking returns can achieve 20% on their investment, the risk committees of institutions will see this as a signal too much risk and are ready to negotiate in return for comfort, confidence and peace of mind.” said Goh. “As they are often motivated by a desire to diversify portfolios, a lower return is not a problem for them.”

“Portfolio diversification is the strongest motivation for institutions’ crypto curiosity,” said Leslie Lamb, CMO of crypto derivatives exchange CoinFLEX. “But what really binds them is understanding how the crypto yield landscape works and how it’s changing quite quickly.”

Goh from Sygnum agreed. “A year ago, conversations tended to be based on simple questions like ‘what is Bitcoin? “”, did he declare. “Now the queries are more nuanced, reflecting the interest in volatility strategies, illiquid exposure and venture capital type exposure – and commodities are changing in response.”

“With more interest from passive distributors, the role of the intermediary is to act as their trust guide, guiding them through the asset class and creating products based on their risk-return preferences. Lamb added at CoinFLEX. “Once investors hold coins or tokens, they recognize they have many uses – DeFi innovations open up new sources of return, like putting their coins to work as a market maker or liquidity provider. “

The increased convenience provided by regulation will channel more activity from unregulated platforms to regulated institutions and financial market infrastructures, the panelists said. “It will also involve investment banks,” predicted Turcotte. “They are monitoring the progress and when the opportunity / risk equation changes sufficiently, they will come in and package products for institutions and private banking clients.”

“The basic ethic behind decentralized crypto-asset markets has always been direct market participation – and this will remain a driving force in crypto markets,” Lamb added. Agree, Turcotte at Eventus concluded: “But constructive dialogue between investors, market service providers and regulators is propelling rapid growth of new products and services that promises to overtake the direct return-seeking sector of the market. , allowing the participation of a much wider range. investors.

© 2021 The Block Crypto, Inc. All rights reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial or other advice.

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