In spite of its unparalleled opportunities, the crypto industry has been ridden with a number of long-standing challenges.
Despite its ambiguous relationship with the traditional financial sphere as its competitor as well as a potential partner, an enormous growth in value and in a variety of assets has made it extremely attractive for investors. Statistics certainly attest to that fact that cryptocurrencies are not a fad that will blow over, but are here to stay. In 2017, crypto-based funding volume surpassed volumes via the more traditional avenues of IPOs and private equity. At the same time, with a current market capitalization exceeding $200 billion and continuing to grow exponentially, in August 2017 red-hot demand for bitcoin exposure drove prices for the bitcoin-linked Grayscale fund to a level 110% over the price of the underlying bitcoin assets.
Given this background, demand for securitized crypto assets and crypto derivatives in the next five years is expected to continue to skyrocket. Investors wishing to acquire crypto assets or exposure to the cryptocurrency growth have essentially two options to do this: either they can buy ‘raw’ crypto via a crypto exchange, or they can buy a proxy via the traditional financial markets. While both avenues are open to individual investors, for multiple reasons the former is more or less closed to most institutional investors such as pension funds. Some of the principal issues include a lack of titled rights usable by institutional investors, the lack of a legal framework to enable judicial recovery in case of disputes, and of course the substantial risk of theft due to security breaches. Crypto assets cannot be audited at least by the Big Four accounting firms, and cannot be used as collateral within the standard commercial bank framework.Currently, most trading of cryptocurrencies is done via OTC or crypto exchange channels, all of which carry significant settlement and clearing risks. Furthermore, Blockchain transactions are final and irrevocable regardless of the legal contract states, and crypto is not governed by any sovereign. While this may be desirable for some individual investors, it is a red flag for financial institutions.
And while traditional financial markets do offer a few limited avenues, the supply is extremely limited, both in terms of quantity and variety. As a result, thus far it has been difficult for institutional investors to take advantage of this growth. So for example, while investors may purchase Grayscale fund shares, due to substantial premiums charged, the prices of these shares do not always move in tandem with those of the underlying assets. Premiums aside, this makes it an unreliable vehicle for investment. At the same time, there is virtually no way to gain exposure to other leading cryptocurrencies such as Bitcoin Cash or Ethereum.
Moreover, the products currently available on the market have major disadvantages. They expose investors to the credit risk of the issuer because they only provide indirect exposure to underlying assets. This exposes investors to valuation and liquidity risks if the fund owner should go bankrupt. These numerous barriers currently prevent the legacy investors from capitalizing on the emerging opportunities in the industry. Evgeny Xata, CEO of Luxembourg-based CyberTrust, suggests that a flexible supply of securitized crypto notes could solve some of these problems and that making securitized crypto more accessible will also provide the basis for derivative products such as 3x long BTC. A number of financial services companies and fund managers are working on such solutions, but of course, the process is not easy. CyberTrust plans to launch its Global Crypto Notes early in 2018.