52% of institutional investors own crypto assets, according to Fidelity’s 2021 Digital Asset Study, a robust survey of 1,100 global institutions. 71% of Asian institutions in the sample have already allocated to crypto, 56% in Europe and only 33% in the US. The Dispatch is not surprised that US institutions’ adoption trails offshore peers because the regulatory discourse here has been rather adversarial. The SEC’s threat to sue Coinbase over a new product is a good example of high-profile signalling. This is a structural disadvantage for US pensioners and retirees who are represented by institutional investors. Additionally, the New Jersey action featured below is evidence of US regulators enforcing outdated laws that limit consumers’ choice and their ability to maintain purchasing power by investing in an emerging technology. Unfortunately, there is little media attention on the currently regulatory approach to digital assets and how it hinders real returns for consumers and retirement savings.
The follow are Dispatch 30 discussion items on September 17th, 2021:
- 52% of institutional investors own crypto
- Solana blockchain network failure
- Regulators target additional crypto interest account providers
- Stablecoin regulations forthcoming
- S&P 500 sees 54 record closes thus in 2021
- Congress may pass wash sale rule for crypto assets
- COIN SCHOOL – Taking a week off!
52% of global institutional investors own crypto assets according to Fidelity’s 2021 digital asset study
The 2021 Digital Asset Study by Fidelity Digital Assets showed a notable jump in institutional investor adoption of crypto assets. 52% of the 1,100 investors sampled have already invested in digital assets with Asian institutions leading the way with 77% adoption. 56% of European institutions have allocated with US institutions only 33% allocated. The Dispatch posits that many of the US institutions already allocated to crypto are family offices rather than more conservative pensions plans, which are the institutions facing the largest funding holes.
It’s a robust survey of 1,100 global institutions conducted by financial services survey firm Coalition Greenwich between December 2, 2020 and April 2, 2021.
Institutional Investors crypto asset purchase intent is higher still
What jumps out in future intentions is that 60% of US institutional investors hope to allocate to digital assets, which is nearly double the 33% who have allocated already.
The US money management market is the largest in the world. This BCG report on the global asset management industry estimates US investment funds at $49tn in 2020 with 53% in institutional mandates and the rest in retail/high net worth accounts. This probably does not capture family offices that often invest directly instead of using asset managers. The impact of 60% of US institutional investors allocating to crypto yields a back-of-the-envelope $7tn change in the pool investing in digital assets. One percent of that US$7tn potential change yields ~ US$70bn, which is a notable amount compared to the US$2tn value of the entire digital asset market today. It’s probably fair to assume that these institutions will only adopt the highest quality digital assets with the longest track record.
Solana instability – another example of the inherently higher risk of Digital
The lead story in Dispatch 28 was the brief Ethereum chain fork a few weeks ago, which received scant attention. This week, we had high-flying layer-1 protocol Solana go offline for 17 hours. Luckily, we are in a bull market, and the Solana token only dropped 10% despite a pretty serious hiccup that stopped all services built on Solana. If blockchains are to become mainstream by gaining a substantial share of today’s centralized service, reliability will need to improve dramatically. When things go wrong in decentralized networks there is nobody there to help. You simply do not want networks to fail in the fashion that Solana did this week. You can read more about the issue on Coindesk and Bitcoin.com. The tweet below from Solana wallet Phantom, illustrates the seriousness, when you can’t access the funds in your wallet.
However, just like with the Ethereum fork, there has been limited detailed follow up on the hiccup by crypto media outlets. Eyeballs have moved elsewhere without a deeper evaluation of the implications of the stoppage. What does the issue say about the challenges of higher transaction throughput vs. network stability and centralization?
Regulatory scrutiny of crypto interest accounts expands
On September 17th, New Jersey’s securities regulator issued a cease and desist order against Celsius Network, as this Blockcrypto article explains. This follows NJ’s earlier action against Blockfi (see Dispatch 24) and the SEC’s Wells Notice against Coinbase’s Lend product (see Dispatch 29). This action highlights the urgent need to pass updated investment laws to bring them into the 21st century. Trying to fit securities law issued in 1933 or a 1946 Supreme Court Ruling (Howey Test) to new technologies like digital assets is a disservice to consumers.
Consumer protection at the expense of consumer choice and return suppression is a terrible regulatory regime
Ironically, much of the regulatory action is done in the name of consumer protection. Yes, we need better consumer protection in crypto, but that does not include preventing consumers from earnings a real yield from their digital asset holdings. Banks, in contrast, provide near zero interest on your US$s despite inflation staying above 5%. The Dispatch has a fiduciary duty (laid out in another old law – The Investment Advisor Act of 1940) to maintain and grow clients’ purchasing power. Bank deposits and fixed income today destroy purchasing power, so our regulators and politicians aren’t protecting consumers by preventing access to assets that offer real yields (yields that are higher than inflation) and higher potential returns. Go ahead and provide the rules for crypto firms to operate in an environment that provides consumer protection, but don’t throw an old rule book to bury these new products and return streams. The centralized crypto interest accounts have thus far operated without consumer loss, to the Dispatch’s knowledge. Defi interest products have been exploited with permanent capital loss to investors, but Defi is hard to regulate.
More Stablecoin regulation coming?
Staying on the theme of rising regulatory action, this Bloomberg story says that new stablecoin regulations are possibly weeks away. The focus on maintaining good liquidity into stablecoins, illustrated in the paragraph below, is encouraging.
However, part of the story has more adversarial undertones as the picture below (highlights by The Dispatch) illustrate.
The Dispatch is in favor of more centralized stablecoin oversight. The reserves that ensure 1-to-1 stable peg between the stablecoin and the US$ should be more transparent than what’s available today. The regulation hopefully coincide with better access for crypto firms into the Federal Reserve payment system, so liquidity can flow reliably between the two markets. The flow of US$s into crypto markets is a bottleneck today and a source of risk because very few traditional banks service the crypto industry.
S&P has had 54 record closes in 2021
Traditional assets like stocks are also in full-on bull phase. We have yet to close out the 3rd quarter, but the S&P has already recorded 54 all-time high closes in 2021. The chart below puts that trend into historical context. This WSJ article provides more details including the chart below. `
Congress may pass a wash sale rule for crypto to obtain more tax revenue
Since crypto currencies have been categorized as property (not securities) by the IRS, wash sale rule applicable to securities like stocks and bonds, don’t impact digital assets. Investopedia explains what a wash sale is. Even though wash sale rule does not apply to property, Congress is looking to introduce a wash sale rule specifically for crypto. This Blockcrypto article provides more detail on our politician’s patchwork approach to regulation instead of passing more comprehensive regulations on this new technology. This Forbes article provides examples of wash sales in action. The Dispatch will be watching this space as it could further trip up digital asset investors’ tax obligations.
Stay safe, enjoy the waning days of summer and do reach out if you have any questions or comments about the material in this Dispatch.
|This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results.