The Crypto assets and their modes of regulation are growing concerns among investors and financial markets. Regulators, governments, and central banks are studying the limitations, opportunities, and threats posed by the crypto industry. The blockchain technology is proven to support well-known crypto-assets. These assets have huge potential for cost-saving and efficiency-enhancing applications for digitally recording trading activities, safe custody, and subscriptions.
Nonetheless, there are many fears surrounding the new technologies. Experts think that moving into these uncharted investment territories may undermine and restrict future innovation in the case of malfunction. Although a new financial world order beckons, it is necessary to make the new feature in the investment landscape less risky and more appealing.
London & Oxford teamed up with OMFIF to research and produce the crypto-asset regulatory landscape report reflecting prospects for institutional investment and technological advances in the markets. They focused primarily on best practice in crypto assets regulation. Considering various taxonomies for classifying crypto-assets and ICOs is essential for strengthening this asset class within a secure regulatory framework.
The research also aimed at discovering ways of reducing challenges to entering the crypto market. Tokenizing larger, more illiquid assets and developing new products like exchange-traded funds that can get recorded digitally using blockchain technology.
OMFIF conducted a survey between August and November 2018. Respondents were potential investors, family offices, asset managers, crypto-platforms, blockchain hedge funds, and sovereign funds. This study revealed diverse interest levels and skepticism in this budding asset class.
The questions in this survey sought to determine the main factors that influence investment decisions in the crypto-assets market and the regulations that would get considered as the most favourable. The participants were asked whether they had invested in the crypto market and the information they relied on to make their investments. Also, they were asked how the markets could be made more attractive for sustained profitability.
The research also sought to expound on how international bodies and countries have approached the market and which jurisdiction favor or restrict the crypto-asset investment the most.
Transformative Growth of Bitcoin
At its inception in 2009, Bitcoin was intended as a decentralized currency alternative that operates independently from the financial and regulatory systems. However, over the years it has turned to become a speculative asset class based on its volatility. It is challenging to state the definite price of Bitcoin at any given time.
Experts and analysts have strived relentlessly in the past to develop models to determine the underlying innate value subject to the investors’ interest and the number of transactions executed successfully. But, none of the proposed models has proven to be a precise gauge of value.
Bitcoin is still considered as a speculative token regardless of the time, money, and effort put into trying to get it into the mainstream. Early 2013, the crypto market gained momentum that poised Bitcoin to highs of $49 before a one-day correction pulled it down to the $33 level. Many new traders and exchanges together with massive media coverage propelled bitcoin to highs of $260.
At the end of 2012, only six crypto assets were in existence. Currently, there are at least 2,000 active crypto assets available in the markets. Exactly 5 years after Bitcoin reached the $1,000 mark, it rose rapidly to surpass $10,000 in 2017. The bulls had their time since the markets rose up to almost $20,000 in mid-December of the same year before losing steam.
This price spike and increased popularity of crypto assets caught the attention of governments, central banks, and other major financial institutions. While a majority of authorities prefer to monitor the markets cautiously, a few are quite proactive. This report highlights various attitudes and examines them on the basis of wider investor behavior subject to the fundamental legal challenges facing the participants.
Source of Investments and Risks
Crypto-assets offer a plethora of benefits, especially for the budding firms. However, the same technology is also unregulated making it a risky unpredictable investment territory. The new market reflects a potentially attractive frontier market for issuers and investors. They offer portfolio diversification providing a new source of capital for many start-ups.
However, it is not all pomp and glamour in this market since fraud and market manipulations are major challenges. The new technology is still in the budding stage which poses greater risks due to its unconstrained nature. An October 2018 study conducted by the European Securities and Markets Authority revealed that at least 78% of ICOs are fraudulent.
These problems overshadow any positivity associated with the crypto assets industry. Most ICOs have deficient white papers that have no information of financial circumstances or backers of a project. They also never specify how the technology will get developed after the initial offerings. Only around 22% have definite roadmaps.
Lack of clarity increases the risk of misinterpretation, fraud, and market manipulation in the absence of relevant regulatory structures. Only 25% of the respondents confirmed they read white papers to access crypto assets and ICOs information. However, the market’s lack of depth leaves it vulnerable to manipulation. A few powerful initial investors may inflate asset prices only to dump them after unsuspecting newcomers have bought in.
Regulators are quite skeptic on how best to approach the new crypto-assets market and regulate it. Some have issued compelling statements and created guidelines for investors aspiring to indulge in the crypto markets. The key legal themes globally and in particular jurisdictions are highlighted while simultaneously exploring future regulatory developments.
The investors are concerned about various issues. 54% of the respondents identified the need to enforce KYC and anti-money laundering procedures. The need to regulate exchanges was also identified as a priority. However, one investor pointed out the anonymity nature of the crypto-asset transactions would make regulations nearly impossible.
The findings from this survey indicate that investors are approaching the crypto-asset market space cautiously. Only 38% of the respondents have invested in this market. On the other hand, a mere 15% have invested in the initial coin offerings. Also, the survey shows that there is skepticism on the basis for investing in the market. Very few people see a significant reason to invest especially after the recent repetitive plunges in the crypto asset market.
Volatility, security, and regulatory risks were identified as the primary issues for prospective institutional investors. International regulation was also a factor considered to enhance the possibility of significant future investment in the crypto assets market. But, investors unreservedly suggested that even widespread regulatory efforts would not reduce the time frame that they had earlier planned to invest in crypto assets.
Higher risks also attract higher returns. Investors acknowledged that some market aspects like the massive tokenization of larger, more illiquid assets and the introduction of new products like exchange-traded funds make crypto asset markets highly attractive. One investor responded in the survey that backing the coins with larger real assets would enhance the credibility of these assets.
Potential and prospective investors indicated that some jurisdictions like Australia, Malta, and Switzerland had made considerable progress on establishing a stable and favorable regulatory environment. Therefore, these locations are more appealing for investment compared to other jurisdictions like China that have adopted a hostile approach to the crypto market.
The results of this survey highlight the nuanced dynamics of crypto-assets investments. They also offer an insight into investor thinking on the involvement in the crypto asset market. It goes ahead to suggest potential next steps participants, speculators, investors, traders, and regulators.