Advice for crypto firms on joining financial mainstream
Cryptocurrency firms are getting some common-sense instructions about how to build more confidence in ever-volatile blockchain-based tokenized assets.
Financial institutions such as Fidelity Investments and Circle Internet Financial are working to give more legitimacy to crypto assets as an investment among consumers and banks by making them appear more like traditional assets. Despite fluctuations in the value of major cryptocurrencies, the number of digital assets has soared — there are now more than 2,000 of them in the market.
Yet there is much work to be done to shield crypto companies from intense regulatory scrutiny, observers said.
“The challenges to institutionalization are going to depend on who you are in this token economy and ecosystem,” said Kiran Nagaraj, managing director at KPMG. “The elephant in the room is that the assets need to be useful. They just can’t be speculative instruments.”
KPMG recently created what it calls a crypto-asset framework to help companies specializing in the tokenized economy address key challenges such as regulatory compliance.
It includes a checklist of tasks for any would-be crypto token provider that seeks to do business with a bank or asset manager: Establish best practices for investments in, or transferring custody of, digital assets; provide support for the servicing and management of assets; and demonstrate how those assets will be protected from theft or privacy incursions.
Additionally, KPMG stresses compliance with the applicable regulatory frameworks, financial reporting requirements and tax reporting obligations.
The regulatory component might be the most critical piece as scam-ridden initial coin offerings have garnered increased scrutiny in recent months.
The Securities and Exchange Commission in November settled charges against the professional boxer Floyd Mayweather Jr. and the music producer DJ Khaled for failing to disclose payments they received for promoting investments in ICOs. The cases marked the first time the agency had filed charges for violations involving ICOs.
Two weeks later, the SEC settled ICO scam charges with two former executives from AriseBank. Former CEO Jared Rice Sr. and former COO Stanley Ford are expected to pay a combined $2.7 million in disgorgement and penalties.
Nagaraj said ICO scams are an issue, but legitimate crypto offerings still represent good investment opportunities.
“What ICOs are ultimately trying to do is create new pathways of capital to a broader group of investors who might think investment opportunities are not as easily available,” he said. However, “the scams are real. Many ICOs are takers without any real products. Many people will start to recognize that better and start to differentiate real products trying to actually do something.”
Circle, best known for its crypto mobile wallet, is one of the more high-profile companies seeking to bring more legitimacy to blockchain-based financial initiatives.
Circle in October acquired the New York-based SeedInvest, an equity crowdfunding platform that claims to have helped more than 150 startups raise over $100 million through 242,000 individual investors.
Circle CEO Jeremy Allaire said in an interview at the time of the acquisition that the company did not have a time frame for when it will integrate SeedInvest’s capabilities because the acquisition and planned new offerings are subject to approval by the Financial Industry Regulatory Authority.
Still, Allaire was optimistic about the prospects of a global digital economy built on crypto assets and the blockchain.
“In the summer of 2017, we came to believe that it was possible to build a token marketplace that combined platforms for tokenizing assets, primarily for capital formation, and for creating secondary market trading for tokenized assets,” Allaire said. “We believe that over time all forms of capital formation will be tokenized, and operating a regulated broker-dealer and [alternative trading system] is important to realizing that vision.”
Fidelity Investments fueled Allaire’s line of thinking in October when the company launched Fidelity Digital Asset Services, which buys and sells cryptocurrencies on behalf of its institutional clients.
Tom Jessop, the head of Fidelity digital assets, said at American Banker's Block FS conference in New York that the company’s foray into crypto was the result of “basic research and development” with blockchain for the past five years.
He mentioned during a keynote the firm’s work with Fidelity Charitable, a public charity organization that enables philanthropists to make donations to nonprofits via bitcoin. Philanthropists in 2017 donated to the fund $69 million in various cryptocurrencies.
“We have bright expectations for the next 10 years,” Jessop said about Fidelity’s crypto developments. “It will be interesting to watch the space evolve as more corporates get involved in the space.”
Despite Jessop’s optimism, Nagaraj warned about other challenges crypto assets face with institutionalization, chief among them being continued price volatility.
Bitcoin continues its wild trend for investors, for instance, losing billions as it dipped below the $3,800 mark this week after rallying up to $4,300 just days before.
“When people are learning about the assets, the first thing they see is bitcoin going nuts on the price action,” Nagaraj said. “That narrative has to change. It’s about having an understanding of what that specific coin is trying to do and what the broader ecosystem is trying to pivot towards.”