The main challenges to institutional investors’ adopting digital assets are:
- Lack of appropriate regulation and regulatory clarity
- Compliance and visibility
- Accounting challenges
Investing in cryptos calls for a new infrastructure and for investment products designed to bridge the gap between traditional investments and digital assets. Such products are rapidly appearing. Specialist crypto funds (by companies such as Fidelity, Schwab, Citadel, BlackRock collaboration with CoinBase, as well as by crypto hedge funds) offer diversified exposure to digital assets, and their products offer solutions to compliance and accounting challenges, as well as potential alpha generating opportunities. Also, soon NASDAQ will launch an institutional crypto custody service.
Regulation of cryptos has been lacking so far: attempts by the SEC in the US to regulate crypto markets have drawn intense criticism. The main reason for this was the (correct) observation that digital assets require tailor-made regulation, which takes into account special features of the new technology, rather than rely on old-fashioned legislation, designed for traditional financial assets.
But change is coming: just a few days ago, the European Parliament passed the so-called MiCA legislation (Markets in Crypto Act), intended to regulate the cryptocurrency industry, to prevent anti-money laundering, improve supervision and disclosure and protect crypto investors. This is the World’s first comprehensive legislation aimed at crypto markets.
To summarize, digital assets promise a high alpha potential in the long term, and hence should be seriously considered by institutional investors. Legislation and investment solutions aimed at crypto investing are rapidly becoming . wihavailable. But crypto investing requires from institutional investors above all good risk management practices (such as the allocation in the current asset mix, choice of products or funds to invest in, risk-off signals), with which risk management firms can help.