The crypto and digital assets industry is on the cusp of mainstream adoption. Education is the missing piece of the puzzle for those fund managers and institutions who have not yet taken steps into this new asset class. A broader suite of products for access to spot crypto markets will also support greater institutional investment in the space.
By Angele Paris – The crypto and digital assets industry is on the cusp of mainstream adoption. Education is the missing piece of the puzzle for those fund managers and institutions who have not yet taken steps into this new asset class. A broader suite of products for access to spot crypto markets will also support greater institutional investment in the space.
“As institutional activity continues to rise in the crypto sphere, the next logical step is a full regulatory framework,” comments Konstantin Anissimov, Executive Director at cryptocurrency brokerage CEX.IO, “Rules outlining how crypto assets and those building in the space are governed, and how the assets can be used, would provide immense clarity for market participants. Educating regulators and policy makers on crypto as a technology, and as an asset, could and should be the way forward.”
This lack of regulatory clarity is one of the most obstacles holding back institutional adoption, according to Anissimov, alongside the challenges and risks posed by the technology and legal environment.
Discussing ways these latter two struggles can be overcome he outlines: “Technological obstacles and demands associated with owning and using crypto assets are already mostly mitigated by regulatory guidance and a range of institutional offerings by service providers, as well as continued investment in, and research into, the development of better infrastructure.
“Legally, there is opacity in understanding the origins and creations of crypto assets. A clear edge which digital assets have over the traditional financial system is the immutability and full traceability of transactions. This was very well highlighted by a seizure of just USD3.6 billion out of the USD4.5 billion stolen from Bitfinex in 2016. This process took over six years, and the majority of the funds were located, but this is why more and more industry participants are starting to follow the adapted “travel rule” – compliant services for source verification. These challenges could be further addressed by increased transparency from creators of crypto assets, and cemented rules governing how crypto projects can be funded and built.”
From the investors’ perspective, security and custody have been found to be sticking points, preventing them from adopting digital assets into their portfolio, as detailed in a Nickel Digital survey in June 2021.
“In the time since that survey was conducted, the industry has begun to implement solutions like distributed keys and multi-party computation (MPC) vaults. Forward-thinking institutions should know the full story, and this is precisely why CEX.IO has a presence at events like the ones organised by Hedgeweek,” Anissimov explains.
Domino effect
Despite potential hesitance, the past two years have seen a significant spike in institutional activity within the digital assets market. According to PwC’s 2021 crypto hedge fund report, the estimated total AuM of crypto hedge funds climbed from USD2 billion in 2019, to USD3.6 billion in 2020. Further, the average AuM for a single fund is USD42.8 million, and the median return was 128 per cent in 2020.
“This is going to move quickly,” Anissimov anticipates, “Institutional adoption will continue to have a domino effect on crypto as a whole, encouraging sound practices and inviting regulations. The ecosystem is maturing, and the data supports this.”
In terms of investment opportunity in the space, he believes decentralized finance, or DeFi, is a massive opportunity for institutional investors: “DeFi is essentially an organisation or platform that is distributed, living entirely on the blockchain thanks to software code (AKA smart contracts).
“DeFi is the democratisation of finance, and there’s already a diversity of structured products in this area. Take liquidity pools consisting of a mix of stablecoins as an example. Since they are pegged to real world assets or fiat (like USD), stablecoins have the perks of crypto without the market volatility. DeFi liquidity pools have granted investors returns in the order of 8-10 per cent.
This is not to say that liquidity pools have no risk. Unlike traditional finance, the smart contracts fuelling them could be compromised, and the stablecoins in question are less solid than country-backed currencies. But savvy institutional investors will increasingly find these risks manageable.”
However, Anissimov laments the persistent lack of products providing easy exposure to spot Bitcoin and other cryptocurrencies: “Some institutional level investors don’t want to incur the added risks and maintenance of taking custody of crypto in order to gain spot exposure.
“The products that currently exist (i.e. futures and miner ETFs) offer exposure to derivatives and the greater ecosystem, but not to BTC itself. But, institutional grade infrastructure and service provider offerings have grown more robust. These developments are beginning to address the lack of true institutional-grade digital asset services.”
Konstantin Anissimov, Executive Director
Konstantin joined CEX.IO Group in 2020 as Executive Director. His areas of responsibility include customer relationships with institutional and VIP-clients, overseeing the company’s development strategy, new products, markets and partnerships. As a member of the Board of Directors, Konstantin is also responsible for corporate governance. Before joining CEX.IO, Konstantin worked for 4B Group.
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