by Anton Chashchin
Yes, cryptocurrencies have achieved what enthusiasts have long wished for and gone mainstream. The figures show that adoption took off in 2021, with global adoption up 881% in June 2021 compared to June 2020.
But what has really accelerated this is the involvement of institutions. 52% of financial institutions already own cryptocurrencies, with 71% of the rest expecting to buy digital assets soon. Suddenly everyone wants a slice of the crypto pie.
However, it’s not all plain sailing and the titans of finance face four main obstacles in their adoption. The good news is that the market is slowly providing the solutions needed for the crypto ecosystem to progress.
First and foremost, institutions are asking a lot of the same questions: what is Bitcoin? What is blockchain? Is it safe? How can they get involved?
The simple fact is that institutional investors still lack a sufficient understanding of digital assess how these assets work. Cryptocurrencies are still fundamentally new assets, which are still finding their feet themselves.
For the institutions moving into digital assets, their journey is still in its infancy. Adoption has only really just picked up and the space is constantly evolving so institutions can find it hard to keep up with the latest capabilities.
Wall Street may be amassing an army of crypto experts with thousands of new jobs at top firms since 2018, according to Revelio Labs. But the demand for knowledge far outweighs the amount out there. There is a lot to learn and it’s hard to find the right talent to support pilot projects. Not all institutional investors have time to train their staff in order to successfully branch into the space.
That said, institutions can rely on external support. As institutional demand for expertise has grown, companies have emerged to support firms to build crypto services and integrate crypto into their business. In choosing reliable partners and hiring experienced consultants, institutions can realise their crypto ambitions.
The human factor
The second factor is to do with the differing internal opinions. Even if firms have support for adoption in their ranks, some financial leaders remain sceptical. They reject the culture and core principles of cryptocurrencies movement of decentralisation, anonymity and what they perceive to be instability. As institutions of traditional finance, cryptocurrencies challenge their position in the status quo, so they defend the old foundations of finance.
In part, this is motivated by the protection of their customers. They remain convinced that cryptocurrencies are a scam and potential bubble that could damage their business, clients and the wider economy.
Considering each move in crypto follows extensive risk assessment, business planning and board approval, these concerns stall adoption. Ultimately, the inherent cautious attitude of some financial leaders goes some way to explaining why some firms have yet to take their first steps.
Slowly but surely though, the scepticism is giving way to the benefits. These days, most big financial companies are exploring digital assets in some capacity. The long list of institutional adopters includes the old guard of investment banking like JP Morgan, stalwarts of asset management like BlackRock, the backbones of our payments infrastructure like Visa, as well as disruptive Fintechs like Revolut.
Adding fuel to the scepticism, cryptocurrencies come with compliance concerns. The lack of governance in cryptocurrencies means some firms see them as potential compliance risk, leading them to label the crypto market as a “Wild West”.
Despite recognition of the need for guidance, most regulators – including the SEC and FCA – are still working out the best way to regulate crypto assets Importantly, there is a lack of uniformity both on whether crypto is a force for good and how to define it. Some markets, such as China , have simply banned digital assets outright. As well as this, the crypto ecosystem is also fast-evolving, which adds to the struggles for regulators who tend to be behind the curve of innovation. As an example, most markets have yet to implement policies on Bitcoin and Ethereum when other digital phenomena (such as NFTs and DeFi) have already popped up.
Traditional financial companies have both a responsibility to their clients and have strict standards to uphold relating to investing and trading. They must remain compliant, which makes them nervous of volatile, undefined and ungoverned assets like cryptocurrencies. From their perspective, better to err on the side of caution when faced with any ambiguities to avoid any compliance infringements.
Once regulators have set up frameworks, institutions are likely to launch into digital assets more confidently.
On a similar vein to compliance, finance companies have to uphold certain ESG standards. The trend towards sustainability has spread to the investment sector in recent years and investor demands mean that institutions must take steps to become sustainable. Many have committed to hitting certain ESG goals and therefore cannot invest in areas or work with companies that are not environmentally friendly.
The recent data showing that Bitcoin – and mining in particular – is using the same amount of energy as a small country has made some firms nervous about the environmental impact of investing in digital assets. Research from European asset manager, Candrium, in 2021 has also made the case that cryptocurrencies have a long way to go to satisfy ESG criteria.
However, recognising the need to reduce the carbon footprint of the technology, the market is now investigating ways to reduce energy consumption by making upgrades to the network. This will tip the balance of the ESG scale to allow for institutional involvement.
In addition, cryptocurrencies are built on blockchain technology, which provides more utility than fiat money. The secure, fair and inclusive nature of cryptocurrencies make them potentially more valuable than fiat, but even if institutions were to argue that cryptocurrencies themselves are not ESG-friendly, blockchain technology certainly belongs in that category. This approach offers perspective that fiat currency cannot have.
This year, the institutional race in crypto will accelerate. Even if the institutional community is still worried about using cryptocurrencies, they are the future. The market may have had a bad start to the year, but the wheels are in motion and that momentum will undoubtedly continue.
To succeed, institutions must build their knowledge of the space. They need to understand it, learn how it can benefit them and enter the market with confidence.
Anton Chashchin, Managing partner of Bitfrost.io