Crypto should not be dismissed as a dangerous investment option

[ad_1]

In the annals of crypto, 2022 will go down as the year this industry nearly died. But then December saw the birth of a pair of exchange-traded funds in Hong Kong, offering new hope. Asia’s first futures ETFs for Bitcoin and Ether join a growing list of initiatives that could ease the legitimacy crisis facing virtual assets. A big shocker is the confusion over the safe custody of crypto assets. Sam Bankman-Frieds FTX, the most spectacular of last year’s crypto debacles, brought unhappy clients of the failed exchange before a US bankruptcy judge who will determine if they are entitled to the money before other creditors . But FTX is not the only test for crypto custody. Last month, a US bankruptcy judge ordered insolvent network Celsius to return about $50 million that never earned interest. But the fate of billions of dollars of user funds locked up in interest-bearing accounts is still in question: does it belong to the debtor’s estate or to customers? The uncertainty should ease as cryptos move to normal exchanges as mainstream securities, like stocks and bonds. This will place client assets under standard safeguards. For example, the new ETF CSOP Bitcoin Futures will place the custody of client funds with the HSBC-registered trust company in Hong Kong which suffers [checks].

This is what fund managers were waiting for. Adults in the crypto park will bring adult rules with them. No one knows if today’s digital assets will be anything more than vehicles for speculation, but tokens of the future could represent significant economic value. On that premise alone, it may be useful to create a safe setup now for capital to flow into.

The Hong Kong crypto ETF is just one example of the financial industry trying to provide protection in a legal vacuum. Bank of New York Mellon, custodian of $43 trillion in client assets, recently opened its vaults to receive cryptocurrencies from some institutional clients. BlackRock has added crypto to its Aladdin platform, used by pension funds and other large investors to oversee their portfolios. Fidelity’s brokerage unit has been providing custody services to hedge funds since 2018. It is now launching a commission-free Bitcoin and Ether trading service for retail clients.

Olivier Fines of the CFA Institute cautions against overreading efforts at the private industry level. The de facto insurance offered by a BNY Mellon, Fidelity or HSBC is largely a product of their size and scale, not something smaller institutions can easily replicate. For there to be a competitive market in crypto custodial services, new laws need to close existing loopholes,” Fines said. One such loophole is in the US SEC’s Client Protection Rule. It’s insurance for customers who are averse to queuing with general creditors to recover pennies on the dollar if an intermediary fails.

But is an exchange token, like FTXs FTT or Binances BNB, a security or a utility? In its complaint against FTX co-founder Gary Wang and former Alameda Research CEO Caroline Ellison, the SEC claimed that FTT is a security. So far, however, custodial protections, like other investor protections for digital assets, remain largely untested in court,” Fines and his colleague Stephen Deane said in a CFA Institute report. Revolutionary or not, technology alone cannot offer protection against age-old financial misdeeds. , ranging from market manipulation and front-running to fraudulent disclosures and Ponzi schemes,” the report states. The crypto ecosystem urgently needs a strong and clearly defined regulatory framework.”

For too long, crypto oversight has focused on money laundering. Customer protection was not the priority. Now the pendulum has started to swing, maybe a little too much the other way. In March, the SEC proposed new accounting guidelines for financial firms that have an obligation to protect customer crypto assets: they must explicitly record a liability and a corresponding asset. But this requirement can backfire if it is considered too onerous. A bloated balance sheet will increase banks’ capital requirements, making them reluctant to offer custodial services.

This regulatory tussle will set in at some point, hopefully with investors feeling better protected and intermediaries not fearing crypto. The techno-anarchist founders of trustless blockchains won’t be thrilled that the same big middlemen they wanted to banish are trying to hijack their creation. But hopefully, future industry historians would conclude that the worst crypto vulnerabilities came out of the woodwork in 2022. After that, things looked up. Digital assets remained unsuitable for most small, risk-averse investors, but at least they became a safer bet for those who didn’t care about volatility.

fleurberg

Know your inner investor Do you have nerves of steel or are you sleepless about your investments? Let’s define your investment approach.

Take the test Catch all the business news, market news, breaking news and latest updates on Live Mint. Download the Mint News app to get daily market updates. More less

[ad_2]