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Institutionalization of Cryptocurrencies

Crypto Institutionalization

December 5, 2020 | 

JOHN K MWANIKI |  0 Comments| 

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The cryptocurrencies rise in recent times never seems to stop. Long gone are the days when crypto was a reserve for the tech-savvy. By then, only a few scientists and tech-oriented personnel believed in its prowess.

After earlier skepticism towards the coin, it is now becoming mainstream. Its use cases are improving with merchants taking it up. The institutional investors are taking notice of the improving coin. They are opening up to putting their money in the virtual currencies' investments. 

Most of the institutional investors earlier avoided cryptos due to security concerns. They operate on strict guidelines that do not encourage flexibility. The volatility of crypto would be too much a risk for them. 

Their stance began changing with the introduction of derivatives like the Bitcoin futures. They allowed the institutions to gain cryptos without the underlying risks. This is due to the derivatives regulations and stability. They also offer assured returns even when the value of the main digital currency changes.

The success of Bitcoin futures led to the growth of other derivatives. Ethereum and Bitcoin Cash also launched futures of their own. This allowed the investors a variety to choose from.

Bitcoin then became tradable as shares after listing on the American stock exchange. Institutional investors started investing in virtual currencies like any other traditional commodity.

Digital currencies are becoming mainstream. Several merchants have started allowing payments through Bitcoin. This was after it got accepted on Wall Street.

The currencies have become tradable through the years. The changes have made it attractive to institutional investors.

Why is the Institutionalization of Cryptocurrencies Crucial? 

The institutionalization of cryptocurrencies is a process, not an event. It involves investors undertaking big projects with clear regulations and increased adoption. All these are beneficial to the crypto world.
Here are the major ways the institutionalization of cryptocurrencies would be impactful;

  • More Trust and Stability

Institutional investors are professional and come with more capital. Professionalism increases the efficiency to advance the crypto market operations.

Injecting the new capital into the sector helps in increasing liquidity. This helps make trading in the currencies seamless. As the coin becomes more tradable, they attract more investors.

  • Recognition as a New Financial Sector

Virtual currencies' main target is to become a financial sector of its own. It seeks to be an alternative to the traditional currency economy. Institutionalization of cryptocurrencies recognizes its viability as a financial sector.

The mainstream sector has more payment providers, crypto exchanges, and brokerages. It also aids research, analysis groups, and innovation.

These additions will be filling a new demand and offer legitimacy to the assets they serve. 

  • Creation of a Fairer Market through Regulations 

Nothing pushes regulations in cryptos like the institutions. They need industry standards, operations, regulations, and legal structures in place. They also need security controls and widespread information disclosure for trust.

Right now, the market has security concerns. Institutional investors do not feel any safe while at it. With all the structures in place, the industry will be more welcoming to investors.

  • Widespread Adoption and Awareness

Cryptocurrencies rely on increased adoption to gain market hold. The adoption of cryptocurrencies impacts everything about them. It increases liquidity, stability, and regulations.

The institutionalization of cryptocurrencies opens it up to more growth. It will have alternative funding options like token offering. It will also open up the cryptos to more recognition and applications. This is where it also gains the trust and awareness of the investors.

Challenges Facing the Institutional of Cryptocurrencies 

Even though crypto use cases increase, it's not the same with institutional investors. They are yet to embrace it for investments or as a medium of exchange. Here are the reasons; 

  • Unestablished regulatory systems 

Even though cryptos have been expanding, they find it hard to become so widespread. The main hurdle remains unestablished regulations. The crypto services providers do not have a blueprint on how to offer services.

Unlike traditional financial service providers, cryptos don't have trusted end-to-end solutions. They also don't provide for any audit trail. This allows for the thriving of illicit transactions.

The institutionalization of cryptocurrencies requires clear regulations. There should be in place laws that determine the various aspects of the trade. It needs to define the crypto assets. Only then can the investors feel secure.

  • Security concerns 

Security and volatility are the top two concerns of cryptos. Digital currencies operate online, thus makes them susceptible to hacking. There have been several incidences of assets lost in the crypto exchanges.

Scams and other Ponzi Schemes are also rife in the crypto world. The institutions would not be willing to put such vast amounts on the line.

The other concern is data security. Cryptos have always taken pride in privacy. Still, they might not be as private. Most record transactions on a public ledger are accessible to anyone. This is unlike the traditional financial system.

The cryptos must streamline its security apparatuses before attracting significant institutions.

  • Tax implications 

The tax practices within the crypto scope are so blurred. As a new decentralized asset, the government is yet to harmonize all the tax implications.

The main reason for the lack of clarity is the undefined crypto nature. The government is not clear on whether virtual currencies are currencies or assets. Treating them as a currency would make them legal tender. A risk governments are still not willing to take. For that, they work as assets hence gain the capital gain taxes.

Several individuals have struggled with crypto taxes. This was evident when the IRS sent notification letters for defaulters. The tax collector believed they underreported or did not reveal earnings from cryptos. 

With individuals struggling, companies might even face more challenges. They have to incur extra accounting and auditing burden. There is also the possibility of legal implications.

The government must streamline crypto tax laws to accommodate mainstream cryptos. Once all the laws are in place, the institutions can then decide whether to embrace the new coins.

Bottom Line 

The institutionalization of cryptocurrencies is the future of virtual currencies. After a long time of avoiding the market, several institutions are fast joining. The commercial banks already allow the trading of cryptos as a financial service.

The sector only needs more regulations to become safer for all industry players.

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