Tighter regulations key for institutional adoption of digital assets

As investors and regulators develop a more sophisticated understanding of digital assets, an increasing number of related products and custodian services has emerged, inviting heightened scrutiny from regulators.

Increased regulation is a double-edged sword for the digital asset industry. On one hand, it lends more legitimacy and attracts institutional investors, but on the other, some experts are concerned that misguided regulations could stifle innovation.

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

“But I do think that regulators need to think of what the underlying asset is and how they're going to regulate that, as opposed to trying to regulate the technology, which by its nature changes all the time anyway.”

Generally, institutional investors have poured funds into digital assets and grown increasingly accepting towards cryptocurrencies, driving regulators to roll out consultations and frameworks.

Asia Pacific families are also more likely (38%) to increase exposure to cryptocurrencies, compared with 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 told an AsianInvestor event in early December that they have indeed been looking to increase and diversify their cryptocurrency allocations, and many have eyed investments into assets enabled by blockchain technologies.

SINGAPORE, GERMANY TAKE THE LEAD

Some regulators are making strides in the virtual asset space. Singapore and Germany, for instance, are seen as the leading regulators in the crypto space, Stephen Richardson, head of product strategy and business solutions and digital asset services platform Fireblocks told AsianInvestor.

“There's clarity and regulation in Singapore. MAS (Monetary Authority of Singapore) has come out and said, ‘We think digital assets and digital finance are a key area of focus for here’. They created the right custodial licenses, digital payments act and licences, and so everyone really understands what the path for it is,” he said.

“That clarity is something that I think is helping Singapore stands apart within the region, plus the investment I think that's happening at a local level to build talent pools for digital assets.”

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

He did, however, take a more neutral tone towards stablecoins and central bank digital currencies (CBDCs), saying that the central bank is still contemplating its approach to stablecoins and that it must approach it with flexible regulatory chains.

On CBDCs, he said that “MAS sees much promise in wholesale CBDCs. They have the potential to radically transform cross-border payments.”

Regulators will also take cue from the Financial Action Task Force, Richardson said. “They generally provide a high level of guidance, that each regulatory body will then take, adapt and customise,” he said.

INSTITUTIONAL ADOPTION

Stronger regulations could be the key for meaningful institutional adoption of digital assets to happen, said Benjamin Quinlan, chair of the Fintech Association of Hong Kong.

“Overall, that tilt towards legitimacy means that in order for true institutional adoption to occur, the product set that surrounds the digital asset universe needs to be more security like in nature,” Quinlan told AsianInvestor.

“And that's why you haven't seen any real institutional adoption. 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.

True enough, asset owners have invested in various fintech companies. In October, Singapore’s Temasek and the Ontario Teachers’ Pension Plan Board led funding for crypto firm FTX Trading in a $420 million funding round that brought the firm’s valuation to $25 billion.

 “It’s very feasible for a company to invest in a security like the firm itself, but not the underlying [asset such as cryptocurrency]. So there’s a broader narrative here that for true institutional adoption to occur, will digital securities need to start to come to the fore? And, you know, our view is very clear. Yes,” Quinlan said.

“If you want real institutional money there as opposed to high-net-worth fringes of family office, fringes of hedge funds, and crypto native funds, then you have to put products in front of [institutions] that they can actually buy, that they can be comfortable with given their broader fiduciary responsibilities, and that their investment committees can say, yep, that's totally fine because it is a protected regulated security,” he added.

The industry needs firms and regulators to work together for effective policies to be put in place, but having companies play ball is a challenge, Fusang’s Chong said.

“Regulators that want to regulate need to come up with cogent rules,” Chong said. “And that needs to be matched by a set of firms who want to come up and meet those rules, but it’s not always easy to find a jurisdiction in which those two things happen at the same time.”

 “A lot of firms have a strategy that is very squarely focused around avoiding any form of regulation at all costs. Because they think this is new technology, it should have different rules, or this is innovative technology, it should have no rules, for example. But like it or not, that's just not the way that works. We need regulators and firms to have the same approach and come together at the same time,” he said.