Aside from liquidity, what do institutions bring to crypto? What precisely is their value? This is an instructive question to ponder because there is little consensus on what deeper institutional participation means for an industry that is riven with contradictions.
The long-running wait for Bitcoin ETF approval — giving pensions and funds exposure to BTC — may well prove to be a positive catalyst for industry growth. But, in focusing on price action, observers are missing out on the real benefit of broadscale institutional adoption. The greatest benefit of deepening institutional adoption may be the regulatory certainty it ushers in.
Tax and compliance
There are a number of areas where institutional involvement is forcing regulators to give straight answers. Chief among these are taxation and compliance. What trades can a business legally make, how should they be disclosed on its balance sheet, and what steps must it take to report these activities?
Determining what constitutes a taxable event in crypto depends on your dominion. While United States-based traders are required to calculate profit and loss on every trade on a decentralized exchange, perps position and on-chain events, other countries take a less rigorous approach, while a few don’t bother to tax it at all.
Regardless of where you reside, determining your obligations when buying, selling and storing digital assets can be a headache. But it could be worse: imagine how much more is at stake for businesses whose public accounts must be scrutinized and which typically require permission to list Bitcoin on their balance sheet.
There are good reasons why a higher bar is set for enterprises in terms of compliance, disclosure, reporting and taxation compared to consumers. It’s a primary reason why it’s taken so long for serious institutional adoption to manifest. But as the trickle of financial firms gaining a foothold in the space turns into a flow, the retinue of lawyers and lobbyists in tow has begun to yield dividends. When BlackRock starts beating the drum for a Bitcoin ETF, even the U.S. Securities and Exchange Commission (SEC) has to sit up and take notice.
Grayscale’s favorable court ruling against the SEC on Aug. 29 has shown the power institutions can muster in forcing regulators to renegotiate. The precedent this appeals decision sets will further increase the confidence of institutions in their ability to reframe legislation in their favor.
Seeking regulatory clarity
For those who already have skin in the game — sole traders, trading firms, family funds and venture capitalists — greater institutional involvement can only be a good thing. When the largest institutions decide they want in, it forces regulators to play ball. Not every provision that’s consequently pushed through the statute books will aid the industry — some will be asinine — but collectively they provide something that’s been missing for years: clarity.
Is Bitcoin a security? What about Ether
The answer, at present, depends on who you ask. Some agencies seem intent on declaring everything bar Bitcoin a security; others take a more measured approach, focusing their enforcement efforts on the most egregious token sales and shills.
Institutions can’t trade assets that lie in regulatory no man’s land: they need black and white, not shades of gray. Their increasing participation in the market is bound to provide clearer answers in terms of crypto classification, which will benefit the entire industry.
In addition, greater institutional involvement is legitimizing digital assets by making them less exotic to those tasked with regulating them. Crypto opponents can’t justifiably claim the industry to be a hotbed of money laundering and wash trading when its most active participants include the world’s leading trading firms.
Signs of institutional adoption
Today, businesses and governments are pressing ahead with blockchain-based initiatives such as CBDC pilots. In Asia alone, Hong Kong and the Bank of Japan are exploring programs involving digital currencies.
Meanwhile, banks from the U.S. to Europe are introducing crypto custody and trading services for their clients. And in August, Europe’s first spot Bitcoin ETF listed in Amsterdam, proving that institutional willpower eventually gets things done.
Regulators and institutional players are still catching up in terms of expertise to those who helped build the industry from the ground up in its early days through hands-on participation. No one has complete mastery. But as a rising tide lifts all ships, greater institutional involvement will bring benefit to all players, from the humblest yield farmer to the richest whale. Rather than assume any one group has it all figured out, an open and collaborative dialogue is most likely to lead to positive outcomes. Regulators, institutions and early adopters each offer unique insights.
You don’t have to thank them, but big institutions are a net positive for the industry. Bigger players produce better rules — and better outcomes for everyone.
Source : Cointelegraph By Gracy Chen / September 30, 2023