Don’t mourn for crypto: it’s leaping back to life

Not since Mark Twain, have reports of a death been so greatly exaggerated.  Calling something dead and buried, is a fast and easy way to set yourself above the crowd...

Not since Mark Twain, have reports of a death been so greatly exaggerated.  Calling something dead and buried, is a fast and easy way to set yourself above the crowd as an expert.  Even better, when the thing you are pronouncing deceased rose from technological obscurity to a high-powered asset, made a few institutional investors and a multitude of arm-chair stock-pickers very wealthy, then collapsed in value.  I am talking of course about cryptocurrency. That enigmatic asset class called by naysayers ‘rat poison’, ‘a ponzi scheme’ and more recently, ‘dead’.

At the end of 2022, following the spectacular collapse of FTX Bitcoin, which fell in value from its heights of US$64,000 to depths of US$16,000, most in the finance industry (and media) thought that crypto had finally been killed off once and for all.  Following the collapse of FTX in January this year, regulators and lawmakers in the U.S. rightly increased their scrutiny on the crypto industry.  The increased scrutiny led some crypto leaders to cry foul claiming that regulation would kill their industries and business models.  But the truth is that crypto has coasted along for some time free from the vast bulk of regulation, and this may be the exact thing that has kept it from maturing into the asset it always promised it could be.  We might not like how the industry is being regulated, but regulation is what will allow it to flourish.

At its heart cryptocurrency is a technological offering. A decentralised financial system that can move faster than traditional financial networks and has the potential to be more secure.  It’s a great idea that deserves to be explored.  But for a long time the biggest companies exploring the applications of crypto have done so, almost completely unregulated.  This has led to the catastrophe of FTX, but also a myriad of other issues the US Securities and Exchange Commission are now attempting to clean up.

US Securities Exchange Commission (SEC) chairman, Gary Gensler said many crypto exchange companies made “calculated decisions” to flout the rules.  In his view, the vast majority of crypto tokens meet the test for being a security and so should be registered with the SEC. That means most crypto exchanges have to comply with the securities laws too.  The regulator has moved to sue two of the largest exchanges, Coinbase and Binance, for this very issue.  Anyone upset at this situation is just not paying attention.

If you want to hail crypto as a game-changing asset, you can’t just pick and choose which rules you want to follow and ignore the rest.  An asset like crypto, that is based on a new technology that changes the way we think about an entrenched idea like ‘finance’, only works when it is embraced and understood by everyone.  But an asset that can be used by everyone needs to be protected in the same way as other securities.  So people can feel confident to understand, invest and develop it as an idea.  This is exactly what we have seen increased regulatory focus on cryptocurrency achieve over the last few months.

Rather than scare off investors, the increased regulatory scrutiny has encouraged some of the biggest investors in the world that cryptocurrency warrants being taken seriously.  The world’s largest asset manager, BlackRock, has this month filed to list a Bitcoin ETF with the US SEC.  The price of Bitcoin quickly shot up almost 15% with the expectation that a new regulated product from the world’s largest fund manager would drive more demand and push prices higher.  The BlackRock Bitcoin ETF is a huge about-face from the global asset manager, which in 2019 warned that only investors prepared for “complete losses” should touch cryptocurrency.  But now, by throwing its leviathan weight behind crypto, it has changed the game for everyone, and helped push up the Bitcoin price on its way through.  But what has really changed since 2019 to make BlackRock turn from seeing crypto as an opportunity for “complete losses” to an asset on the rise?

Cryptocurrency adoption has increased, but the technology at its heart has remained the same.  There has been a swathe of new coins minted, but the mastheads of the market Bitcoin, and to a lesser extent Ethereum, have also remained the same.  There have been announcements of additions to the ‘blockchain’ technology such as the Metaverse, and NFTs, but the bulk of the wealth related to crypto remains in its coins.  The only thing that has changed is now the regulators have been forced to come to the party and figure out a way to bring crypto under their remit and finally allow it to become a true asset class.

kōura Wealth, of which I am chair and a shareholder, was the first Kiwisaver provider to offer a cryptocurrency fund, which we launched in late 2022:  it has been the best performing KiwiSaver fund over the past six months.  We are big fans of the increasing regulatory environment and want all retail investors to be able to access the safe and secure investment structures that we are able as an institutional investor.

It is regulation and investor continued demand that has most probably inspired BlackRock, and it will inspire others to take another look at Crypto.  Regulation will push it into the mainstream which is what many institutional investors are waiting for.