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Can the Revolution be Regulated?
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Does institutionalization and regulation of crypto mean the end of the Satoshi vision? Is Satoshi’s vision still applicable in a modern setting? What would Satoshi make of regulation?
As Linda Wang, LendingBlock Co-founder and CCO pointed out, we don’t really know what was going through Satoshi’s mind when he wrote the whitepaper 10 years ago. But we do know that there were problems at that time and that he wanted to create a trustless, peer-to-peer system of value. That was the dream, but what was meant to be a fast, easy-to-access solution, Bitcoin, is actually not that easy to access. Now institutional funds, whose job is to make financial services accessible, are coming in to solve some of the problems created by crypto assets.
This set the ball rolling on an informative and invigorating discussion at Rise London between Linda, Andrew Robinson from Coinbase, Katsu Konno from Liquid and Quartz’s John Detrixhe.
Things change, noted John. Viagra was originally a heart product but went on to become a billion dollar industry. So what of Satoshi’s vision?
Perhaps it doesn’t matter what Satoshi’s original goal was, said Andrew. The Coinbase mission is to create an open financial system for the world.
About 90% of activity now is in the investment phase which is being driven by institutions, with the remaining 10% in utility. This should eventually shift the other way, but it’s anyone’s guess how far away this is. ~ Andrew
The beauty of cryptocurrency, said Katsu, is decentralization. When Satoshi created Bitcoin, he knew that. He thought Bitcoin would be mainstream in the financial sector. In that sense liquidity is the most important thing in the financial world. Who can provide liquidity? Institutions. So institutionalization is in line with Satoshi’s vision.
It was around 2014 that we first saw institutions coming into the space, said Andrew — market makers, proprietary trading firms, family offices, Now the majority of Coinbase’s clients are still market makers and liquidity providers, and then below that are emerging hedge funds and VC funds.
In Japan, there’s a lot of skepticism towards crypto, as Katsu knows all too well.
There’s not much trust to go around, but with the likes of Japan banking giant Mitsubishi, one of the largest financial institutions in the world, coming into the crypto space, these institutions can bring trust into the market. Mitsubishi is too big to innovate in fintech, so it’s important for them to work with someone like Quoine and Liquid to enter this world. ~ Katsu
One hot topic that seems to keep coming up is custody, said Andrew. In crypto, everyone is talking about custody. Institutional investors have custody on their checklist of things they are looking for to make them feel comfortable. What’s more interesting is how the custody product is going to evolve over time. How will custody support proof-of-stake mechanisms or allow someone to lend and borrow assets?
The three real barriers to institutional adoption of this asset class: better trading venues, custody offerings and prime brokerage services. ~ Andrew
We have to decouple custody from the exchange. ~ Andrew.
A custody solution doesn't mean anything if your assets aren’t insured. At the moment, risks of keeping things in cold storage aren’t clear. How can underwriters value the risk? They have to make sure the risk of payouts is small. But in crypto, there are few people looking for insurance and the payout is huge. That’s a question we are facing with insurance providers. They don’t understand how to pay out a loss or how much to pay out. ~ Linda
On insurance, Katsu pointed out that many exchanges do insurance, but this does not guarantee all losses from hacking or compromised accounts. It’s difficult for an insurance company to take a huge risk with cryptocurrency. Traditional insurance companies don’t understand crypto.
The conversation then turned to regulation. Coinbase will only operate in places where they can secure a license. They just recently opened an office in Japan and are applying for a JFSA license. When you’re in a regulated space, you have to run fast and operate within the boundaries you’re given. Coinbase, like Quoine and LendingBlock, will always take the approach to actively engage with regulators.
In some jurisdictions, existing regulations are taken and applied to crypto, but it’s not always a great fit, said Linda, In Gibraltar, they have an approach based on common sense principles.
In Japan, all exchanges must abide to the same AML procedures, but this can make it difficult for startups and crypto exchanges. Liquid is increasing the number of employees on the compliance team, internal audit team and AML risk team, and on top of that, Liquid’s board of directors are advisors to the JFSA. But the JFSA cannot monitor everything so they need to give authorisation to the Japan Virtual Currency Exchange Association . The association receives guidance from the JFSA.
With so many jurisdictions competing for this business, is there still scope for the uk to be a leader? Asked John.
Given how broad this space and unregulated, self regulation is a noble goal, but I think we have been given an opportunity to self regulate and it hasn’t really worked, so I think best practice is to engage with regulators. Ultimately rules have to be set and there will new best practice for companies to follow that will foster more transparency in the space so I’m keen to see those evolve. ~ Linda
There are a lot of bad actors out there, said Andrew, adding that this is a hindrance to institutional investors. Is liquidity we see on exchanges real. How do we know it’s there?
At the end of the discussion, the panelists reflected on what the crypto space might look like one year from now.
I think we’ll all still be sitting here in one year. This audience will be bigger, we’ll have more people interested in this space. We’ll see more fines and actions from the SEC. More institutional involvement. Demand hasn’t decreased. People are still looking at this space. I’m super bullish on the space and institutional participation. ~ Andrew
We think lending and borrowing will be a huge thing as a secondary market where loans of assets can be traded. Lot more services like these coming into the market and fitting solutions to institutions coming into the market. Security token offerings should replace ICOs. ~ Linda
Hopefully the price will be going up and up and our QASH token will be a popular currency. Security tokens will be the future in the crypto space. The cryptocurrency definition will be divided into three: pure cryptocurrency like Ethereum and Bitcoin, utility like our QASH token and security tokens. The ICO future will be STO. When STOs comes into the crypto space we need to comply with regulations in an existing security market. In the next year compliance with regulation will be very important to crypto exchanges. ~ Katsu
And so rounded off a great evening of discussion with friends from across the crypto sector in London, the first of many Liquid events to be held in the capital.