Stricter Regulations Key to Institutional Adoption of Digital Assets | Family offices

As investors and regulators develop a more sophisticated understanding of digital assets, an increasing number of related products and custodial services have emerged, prompting regulators for further scrutiny.

Increased regulation is a double-edged sword for the digital asset industry. On the one hand, this gives more legitimacy and attracts institutional investors, but on the other hand, some experts fear that ill-advised regulation stifles innovation.

READ ALSO: Digital Assets Outlook 2022: All Eyes On Regulation As Capital Flows

“My biggest worry is that regulators often confuse technology and asset layer. When you have a native digital asset like Bitcoin, it can be very difficult to separate the two conceptually because the technology and the asset are so closely linked, ”said Fusang, digital exchange founder Henry Chong. .

“But I think regulators need to think about the underlying asset and how they’re going to regulate it, rather than trying to regulate the technology, which by its nature is changing all the time anyway. “

Typically, institutional investors have invested funds in digital assets and are increasingly open to cryptocurrencies, pushing regulators to deploy consultations and frameworks.

Asia-Pacific families are also more likely (38%) to increase their exposure to cryptocurrencies, compared to the global average of 28%, according to the Asia Pacific Family Office report released in November by Raffles Family Office and Campden Wealth.

Family Offices in Asia-Pacific Said a AsianInvestor an event in early December that they were indeed looking to increase and diversify their cryptocurrency allocations, and many considered investing in assets enabled by blockchain technologies.

SINGAPORE, GERMANY TAKES THE LEAD

Some regulators are making headway in the area of ​​virtual assets. Singapore and Germany, for example, are considered the primary regulators in the crypto space, said Stephen Richardson, head of product strategy and business solutions and the digital asset services platform Fireblocks. AsianInvestor.

“There is clarity and regulation in Singapore. The MAS (Monetary Authority of Singapore) said, “We believe digital assets and digital finance are a key area of ​​focus for here.” They created the right custodial licenses, digital payments law and licensing, so everyone really understands what the way forward is, ”he said.

“That clarity is something that I think helps Singapore stand out in the region, as well as the investment that I think is happening locally to create talent pools for digital assets.”

It can be difficult to predict which policies regulators will release next, but there have been some clues. For example, MAS Managing Director Ravi Menon said in November 2021 that “MAS frowns on cryptocurrencies or tokens as an investment asset for retail investors.”

He took a more neutral tone towards stablecoins and central bank digital currencies (CBDCs), however, saying the central bank is still considering its stablecoins approach and needs to approach it with chains. flexible regulations.

Regarding CBDCs, he said, “MAS sees a lot of promise in wholesale CBDCs. They have the potential to radically transform cross-border payments.

Regulators will also draw inspiration from the Financial Action Task Force, Richardson said. “They generally provide a high level of guidance, which each regulator will then take, adapt and customize,” he said.

ADOPTION IN INSTITUTION

Stricter regulations could be the key to meaningful institutional adoption of digital assets, said Benjamin Quinlan, president of the Fintech Association of Hong Kong.

“Overall, this tilt toward legitimacy means that for true institutional adoption to occur, the set of products that surround the universe of digital assets must be more secure than in nature,” said Quinlan. AsianInvestor.

“And that’s why you haven’t seen real institutional adoption. The institutions have invested directly in the companies that deal with these asset classes. They’ve invested in tons of blockchain companies, but a lot of them haven’t invested in the underlying crypto universe, ”he pointed out.

It is true that the asset owners have invested in various FinTech companies. In October, Singapore’s Temasek and the Ontario Teachers’ Pension Plan Board led the funding for crypto firm FTX Trading in a $ 420 million funding round that raised valuation of the company at $ 25 billion.

“It is quite possible for a company to invest in a security like the company itself, but not in the underlying [asset such as cryptocurrency]. So there is a larger narrative here here that for true institutional adoption to occur, will digital titles have to start appearing in the foreground? And, you know, our point of view is very clear. Yes, ”Quinlan said.

“If you want real institutional money out there, as opposed to high net worth family office margins, hedge fund margins, and native crypto funds, then you have to put the products in front. [institutions] that they can actually buy, that they can feel comfortable with given their broader fiduciary responsibilities, and that their investment committees can say, yes, that’s totally fine because it s ‘This is a regulated and protected title,’ he added.

The industry needs companies and regulators to work together to put in place effective policies, but for companies to play along is a challenge, said Chong de Fusang.

“Regulators who want to regulate must come up with compelling rules,” Chong said. “And that has to be matched by a bunch of companies who want to come forward and abide by these rules, but it’s not always easy to find a jurisdiction where these two things are happening at the same time.”

“Many companies have a very clear strategy of avoiding all forms of regulation at all costs. Because they think this is new technology, that it should have different rules, or that it is innovative technology, that it should not have rules, for example example. But like it or not, that’s not how it works. We need regulators and businesses to have the same approach and come together at the same time, ”he said.

Sylvia B. Polson