It took some 200 years for traditional finance to become global and mature. What about crypto, where is it at? The hype wave has settled down, the fog dispersed and now we find ourselves in a trough of disillusionment. In the last couple of years, crypto was in its first stage — everybody was astonished by the working technology per se. Now we’ve entered the stage of tech-based competition which will be followed by integration and real use-cases. 

But seriously, how long will it take to see the crypto industry as a mature market? If we imagine the timeline, there are certain points in the history of crypto, important milestones. The point of mass adoption is preceded by acceptance of financial entities and the public sector. In other words, crypto must become an environment filled by professional players, not enthusiasts, or amateurs. In fact, professionalization encompasses much more than that.

The term ‘professionalization’ involves the following steps:

• regulation of the market and the obtaining of legal status for cryptocurrencies

• development of professional trading platforms

• introduction of derivative trading tools

• throwing out cryptocurrencies that carry no value

• transformation from a chaotic system to a regulated and stable sphere of social activity 

• the inclusion of cryptocurrencies in portfolios of professional investment funds.

One of the key roles in the process of market transformation is assigned to exchanges, since they are the major communication centers between the crypto world and classic market. For Kyrrex, to be regulated or not wasn’t the question from the start. The same certainty pertained to the expertise any crypto exchange must be built upon. Regulated platforms, with a fully-fledged workspace, can move the market forward and attract the pros, simply because they can be trusted when the serious game is on. 

Crypto needs institutional investors to gain sufficient force and backing so that the rest of the audience sees credibility and believes it. The relationship between the two must be truly legitimate, there’s no other way to build something solid. 

Regulatory developments around the world

The interest of institutional investors towards crypto and their involvement relies heavily on regulatory processes. Let’s see exactly how the regulatory landscape has changed within the last six months. 

• April. In the United States, SEC issued a document named “Framework for ‘Investment Contract’ Analysis of Digital Assets”. The statement provides guidelines for analyzing digital assets with a view to security. Almost a week later, the Token Taxonomy Act was reintroduced to Congress addressing the way cryptocurrency is taxed. China presents a proposal to ban crypto mining in case it doesn’t comply with  existing regulations and laws, listing above 450 activities that might be subject to restriction. Later on, NYAG initiates the iFinex fraud investigation. France puts the PACTE Act into force, a digital asset framework. 

• May. FinCEN presents a framework on how the Business Software Alliance applies to the crypto industry, specifically, wallets, DEXs and an array of services. IRS announces its decision on developing a new tax framework. In Egypt, the parliament proposed a bill allowing the Central Bank of Egypt to license crypto-related products. 

• June. SEC takes legal actions against Kik for selling unregistered securities. A group of democrats proposes a bill that restricts contributions of political parties in cryptocurrencies. The Indian parliament proposes a bill to prohibit any crypto-related activity with fines and 10-year imprisonment. French parliament creates a G7 task force to analyze the application of banking regulations to crypto, focusing on consumer security and money laundering. In the global arena, G20 announces its support for new AML standards. 

• July. A group of Congress members addresses Facebook with guidance to cease the Libra network development. SEC approves STX token offering. Leaders of Congress issued a draft of the bill named ‘Keep Big Tech Out of Finance Act’, about the prohibition of large tech companies from establishing crypto assets. In the UK, FCA bans all ‘ill-suited’ products such as derivatives and ETNs due to their volatility, cyber risks and lack of market expertise. 

As can be clearly seen, the situation is quite uneven: some countries activate the green light and provide regulatory assistance, while others turn the screws and pull the plug. Financial regulators, specifically in the US and EU, are moving pretty slow with respect to providing guidance and licenses for institutions willing to embrace crypto. 

Investors: Regulation is both an opportunity and a threat 

Within the last twelve months, the crypto market has welcomed an array of institutions and professional traders. These were motivated mainly by value appreciation potential and portfolio diversification. We’ve seen interest from areas least expected and deemed conservative, such as European pension funds, family offices, as well as the oldest institutions such as the London Stock Exchange. Some time ago, the majority of  investors didn’t want to be the first movers in this domain, but this has changed — they now have more confidence. New tools for institutional investors have appeared, though regulation is lagging behind and moves at a pace less dynamic than the market itself. 

Since institutional participation is the preceding stage to market maturity and acceptance as mainstream, regulation is the cornerstone. It can either boost development of the industry or slow it down. As per comprehensive research carried out by Binance, the change in global and local regulations is the paramount driver of growth for the crypto asset industry:

Source: Binance

Interestingly, the surveyed institutional and VIP clients consider regulation to be a driver of growth and yet a threat at the very same time. It is the first factor analyzed by market participants: to what extent the lawmakers have made the crypto environment favorable.

Increased interest of institutional investors

According to a Grayscale study, the second quarter of 2019 displayed a significant increase in inflow by institutional investors. Since the third quarter of 2018, the same indicator has grown from 59% to 84%. Hedge funds played a dominant part in this increase. 

Despite the fact that regulation is a stumbling block, there were many factors that actually pushed institutional investors towards crypto. We have seen the rise of enhanced custodial services. With a view towards security issues, and the dramatic scope of crypto fraud, there was a huge demand for safe custodianships. As the number of investors grows, the higher the bar will be for custodial services. 

Also, the past performance of cryptocurrency reflects one very important thing: it is not a bubble, otherwise it would have died nearly seven years ago. Over a decade, crypto has demonstrated steady growth; daily volume is worth billions. Bitcoin is the fastest-growing currency in the world. Crypto assets have become more accessible, and they provide a variety of choices in the form of derivatives, futures, forward contracts, and there will be more. The main task of any investor is not to lose money — as simple as that. And when there are options that help to mitigate risks and minimize losses — could one wish for more?

Institutionalization is the key 

The emergence of the internet did a lot for information, how we interact with it — everything about it has changed. Blockchain technology can and will transform the concept of value and finance in the same manner. In order to see the world of finance as an open system, retail customers, even millions of them, are not enough. The requirements of institutions and retail clients are not the same: we are talking about sufficient governance, security, customer protection. 

My point is this: institutional investors are the gateway to mass adoption. The crypto industry needs institutional investors no less than institutional investors need cryptocurrency. The same can be said about retail and institutional sectors: they need each other equally. Institutionalization builds trust, provides necessary oversight and support. The more institutional investors take the plunge, the wider are the masses that follow.