The cryptocurrency industry has received the recognition of being one of the fastest growing industry segments, with unparalleled opportunities. However, the crypto-industry has been struggling to reach its full potential due to various long-standing challenges which are hampering progress. Despite its ambiguous relationship with the traditional financial sphere as its competitor and potential partner, an enormous growth in value and variety of assets has made it extremely attractive for investors.
Statistics certainly attest to that fact that cryptocurrencies are not a fad that will blow over but are here to stay. In 2017, crypto-based funding volume surpassed those from traditional avenues like IPOs and private equity. At the same time, with a current market capitalization of cryptocurrencies exceeding $200 billion and continuing to grow exponentially, there is an increase in demand for additional ways to invest in the cryptocurrency-driven economy.
One of the prime examples is the sudden growth in interest for the Bitcoin-linked Greyscale fund in August 2017, which drove its price by over 110% than that of the actual underlying Bitcoin assets. Given this background, demand for securitized crypto assets and crypto derivatives in the next five years is expected to continue to skyrocket.
Investors wishing to acquire crypto assets or exposure to the cryptocurrency growth are now presented with two options – either to purchase “raw” cryptocurrency over a cryptocurrency exchange or purchase a proxy through traditional financial markets. While both avenues are open to individual investors, for multiple reasons, the former is more or less closed to most institutional investors such as pension funds.
Some of the principal issues include a lack of titled rights usable by institutional investors; the lack of a legal framework to enable judicial recovery in case of disputes; and the substantial risk of theft due to security breaches. Cryptoassets cannot be audited at least by the Big Four accounting firms, and cannot be used as collateral within the standard commercial bank framework.
Currently, most trading of cryptocurrencies is done via OTC or crypto exchange channels, all of which carry significant settlement and clearing risks. Furthermore, Blockchain transactions are final and irrevocable regardless of the legal contract states, and these digital assets are not governed by any sovereign state. While this may be desirable for some individual investors, it is a red flag for financial institutions.
While traditional financial markets do offer a few limited avenues, the supply is insufficient, both in terms of quantity and variety. As a result, it has so far been difficult for institutional investors to take advantage of this growth. For example, while investors may purchase Grayscale fund shares, the substantial premiums charged on these results in the price of these shares not always moving in tandem with those of the underlying assets, making them unreliable vehicles for investments. At the same time, there is virtually no way to gain exposure to other leading cryptocurrencies such as Bitcoin Cash or Ethereum.
Some of the other disadvantages presented by the products currently available in the market include exposure of investors to the credit risk of the issuer as it only provides indirect exposure to underlying assets. It ends up creating a massive risk for the investors as they could end up losing money if the fund owner goes bankrupt. With all these barriers in place, legacy investors are staying at arm’s length from capitalizing on the emerging opportunities in the industry.
Evgeny Xata, CEO of Luxembourg-based CyberTrust, suggests that a flexible supply of securitized crypto notes could solve some of these problems and that making securitized crypto more accessible will also provide the basis for derivative products such as 3x long BTC. Some financial services companies and fund managers are working on such solutions, but of course, the process is not easy. CyberTrust plans to launch its Global Crypto Notes early in 2018.