We are still far closer to the beginning of the crypto story than to its maturity but the construction of a legal and regulatory framework is helping create a more predictable future for the industry
We are fast approaching the 15-year anniversary of the legendary bitcoin white paper, authored by the pseudonymous Satoshi Nakamoto. This milestone offers an opportunity to assess progress, given key recent developments and the role they will play in helping shape the crypto industry’s future.
The digital assets sector’s continual ups and downs have been fuelled by a neverending cycle of hype from retail crypto evangelists, aggressive fundraisers, political hobnobbers, and celebrities after a quick cut. Each time, the promise is followed by a rise and then a crash. Rinse and repeat.
This volatile crypto climate has not however prevented a swift legislative journey towards crypto’s ‘final frontier’, incorporating the emerging asset class into our financial infrastructure.
This evolution has mirrored that of prior tech innovations, beginning with retail exuberance that outpaced actual capabilities. This led to a predictable 80 per cent bitcoin crash, after peaking at more than $19,500 in late 2017. A subsequent period of recalibration, where investors became more grounded, was punctuated by regular upheavals, including bitcoin halving, crypto bans, Ethereum’s Merge, and macro developments in traditional markets.
Rollercoaster ride
After 15 years along this rollercoaster ride, we are still far closer to the beginning of the story than to the industry’s maturity. But we are nevertheless far enough along the journey to better analyse material events.
Prominent among these is the recent court ruling that the SEC’s rejection of Grayscale’s spot bitcoin ETF application was “arbitrary and capricious”.
This should help fortify a boat that can rise with the proverbial tide and weather future storms. BTC futures ETFs, which do not present the same concerns around custody and manipulation as spot counterparts, were first approved in 2021. Moreover, the crypto industry’s continued edging forward shows it is beyond domination by one individual.
Contrary to popular belief, Elon Musk did not crash the bitcoin market with the announcement of SpaceX selling BTC reserves; this came from a record $1bn liquidation of leveraged long futures.
Similarly, Sam Bankman-Fried and Do Kwon did not destroy the crypto industry. Even SEC chair Gary Gensler cannot single-handedly mandate the market’s direction.
Unlike with prior innovations, we are more ‘eyes-wide-open’ than ever before. Of course, there are those that continue to question the utility of digital assets, but this debate is rapidly being put to rest. The upside can be seen, even by hardened critics. We are naturally more open to future innovations today than during the 20th century. The likes of IBM chairman Thomas Watson and DEC co-founder Ken Olsen both had a limited vision for the expansion of computers, as indeed did Bill Gates, who in 1981 famously predicted that “640k ought to be enough [RAM] for anybody”. Even trailblazers occasionally get it wrong. The lesson learned has been to accelerate our progress now by fully imagining the possibilities from the start.
With this sky-is-the-limit ethos in place, crypto believers tend to ride the wave. When the market ascends, holders will be reluctant to sell and instead allow time for consolidation. New market triggers – increasingly based on rulemaking – will set the stage for longer-term expansion, which brings us ever closer to the final frontier. This is where crypto becomes part of the establishment – the kitchen instead of the cutlery – through legislation.
As regulators fail to deliver on the need for market clarity – the EU’s Markets in Crypto-Assets Regulation notwithstanding – the courts become compelled to intervene and unwittingly create the prospect of conflicting interpretations. One case in point is the recent US ruling that XRP was a security only when sold to institutional investors, as opposed to the general public. This was followed by a contradictory ruling in the Terraform Labs case, which concluded that how a token is sold does not determine whether “a reasonable investor would expect the promise of profits”.
Political machinations
This activity has already spurred legislative action. The US House Financial Services Committee recently passed legislation to establish clarity around CFTC and SEC oversight of crypto. Developments such as these – political machinations aside – will drive more frequent and sustained bull runs as investors see concerted efforts to clean up the sector and pave the way for institutional adoption. Traditional heavyweights BlackRock and Fidelity are among those leading the charge, both having filed spot BTC ETF applications.
This construction of a legal and regulatory framework helps paint a more attractive backdrop and a more predictable future for an industry otherwise defined by a combination of unproven technology, fearless evangelism and certain uncertainty, before they eventually give way to real change.
Private banks and wealth managers will be part of the solution, having previously been part of the problem, with their vision of crypto alternately representing the future and losing its lustre. Now that crypto’s role in the financial services house has evolved quickly from visitor to family member, the time is ripe to devote the resources needed to build deep expertise and stay competitive in a rapidly changing world.
Anders Kvamme Jensen (top) is founder of AKJ, the token-driven crypto ecosystem for hedge funds, banks and brokerages, and Neal Mitra (bottom) is CEO of AKJ Crypto Hub.
