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Crypto in deep water without regulatory changes

By Jessica Penny
3 minute read

As digital assets regain favour with investors, investment managers are bidding for a more unified approach to regulating the industry. 

Crypto-assets won’t gain mainstream acceptance without a clearly defined regulatory framework to protect investors, CFA Institute said in a recent report. 

Released last month, Cryptoassets: Beyond the Hype highlighted that the cross-border and decentralised nature of blockchain processes and crypto-assets call for a harmonised regulatory regime at an international level. 

Some regulators are already making steps towards this, the institute offered. The Bank of International Settlements last month established policy approaches to contain and regulate crypto-assets, while the US House Republicans have formed a committee to oversee the industry. 

CFA head of EMEA advocacy, Olivier Fines, warned that crypto platforms combine many of the functions that are kept separate in mainstream finance, such as the roles of brokerages, exchanges, market makers, custodians, and clearing agencies. 

“The debacle at FTX shows the harm that can come to investors and platform participants when client assets are not kept safe,” Mr Fines said. 

The collapse of the FTX exchange in November last year shines a light on the importance of custody issues and the responsibility investors have not to base their decisions on speculation, he added. 

The report offered several recommendations for fiduciaries, investors, and policymakers, including consolidating definitions within crypto-assets, maintaining regulation as technology neutral, monitoring risk build-up in the decentralised finance services sector, and controlling market abuse risk.

“Policymakers should place a high priority on enacting a framework of laws and regulations to ensure the safe custody of customers’ crypto-assets,” CFA added. 

Expounding on this, Mr Fines explained: “Existing regulations that intend to prevent traditional finance firms from using customers’ assets to fund their own or affiliated businesses may not always provide similar protections for investors in terms of crypto-assets or the regulation of crypt platforms.”

For fiduciaries and institutional investors, CFA recommended that investment cases be carefully analysed by value, merit, and risk so that fiduciaries may comply with their duties of prudence, loyalty and care.

Moreover, the report advised that fiduciaries should apply the same standard of quality and care to that of all other assets and pay particular attention to the sustainability of the business model and client acquisition strategy. 

“Policymakers must either agree on the application of existing laws to various components in the crypto ecosystem or craft new laws to fill in any gaps,” Mr Fines commented. 

Ultimately, he warned that “trust in the integrity of crypto markets is essential to attract investors and build crypto networks to scale.”