I’ve been told several times over the past few weeks that cryptocurrencies and digital assets are maturing asset classes and that blockchain is a maturing technology.
These comments, at times, seem like jumps to conclusions. They fail to draw upon facts to back up their bold claims about the future. But they do raise an important question – how exactly does an asset class mature?
We haven’t seen a new asset class for many decades, even my entire lifetime. Yes, we’ve seen the advent of the exchange-traded fund (ETF) since I’ve come of age, but the ETF is more of a product wrapper than an asset class itself. We’ve also seen the growth of indexing and smart beta investing, but these are merely new takes on the same old asset classes investors were using throughout most of the last century.
Is crypto really maturing?
The first cryptocurrency, bitcoin, came about around 14 years ago, making it an adolescent in human years. And if we look at cryptocurrency markets, they’ve been acting like sullen teenagers over the past 10 months – volatile, moody and unpredictable.
All the trials and errors of crypto cause me to reflect on a couple more questions:
First, is crypto just undergoing a brief phase or is it doomed to some extremely long and frustrating period of immaturity before it emerges into a more stable epoch of adulthood? Second, how will we know when crypto has grown up?
The answer to the first question, according to a couple industry insiders, is somewhere in between. And the answer to the second question depends on the regulatory landscape.
Volatility provides opportunity for education
These cycles of growth and downside volatility are just part of the maturation process.
“You have to go through market cycles, especially when you have a new phenomenon,” said Jahon Jamali, chief marketing officer and co-founder of Sarson Funds, a crypto asset manager and education service for financial advisors. “Growth occurs, but then the news shifts from good to bad and you have these drawdowns. And this is the time where people, who were interested but didn’t want to get caught up in the hysteria, start to learn about the new asset class.”
The best part, according to Jamali, is that it will result in “a lot of garbage being cleaned out of the market.”
We can therefore see periods of drawdown, like right now, as opportunities instead of setbacks. The downturn has served as an entry point for many investors and gives clients – and financial advisors – a much-needed chance to bolster their education on crypto before the next market cycle heats up.
Sarson Funds, for example, has seen an uptick in users accessing its educational materials on crypto.
“Now is a great time to come get this education,” Jamali said. “What a lot of people don’t always grasp is that digital assets won’t just be bitcoin and [ether] and so on and so forth. We’re going to see other asset classes tokenized and other types of traditional markets and publicly traded firms incorporated on the blockchain in different ways.”
Regulation may support mainstream adoption
The move from cryptocurrencies into more mainstream asset classes may begin to happen with the help of regulation.
“There’s a growing recognition among advisors and others across the globe that [the crypto space] needs to become much more closely regulated,” said Ben Richmond, CEO and founder of CUBE.
Given that CUBE is an AI-infused regulatory information service for the financial services industry, Richmond has had his finger on the pulse of crypto regulation activity.
Richmond mentioned that, on the other side of the chasm, technology firms that have been driving crypto will converge with the traditional financial world – and consequently the regulatory framework and regulated community at large.
At the same time, the traditional financial community together with regulators need to be careful not to overstep their bounds.
“Hopefully this convergence doesn’t stymie all the innovation, but can put forward the imperative of governance and control in the same way that any other financial entity is regulated,” Richmond said.
So far, that has not been the case. There is a gap present between digital assets and regulators because digital assets have evolved and proliferated much faster than regulations can respond.
“Over the next two or three years there’s got to be a catch-up and alignment where regulators can address what is absolutely going to become mainstream financial infrastructure in pretty much every sense of the phrase,” Richmond said. “It will have to become very heavily regulated in a way that other traditional financial markets are regulated.”
As a result, another gap will emerge between new and incumbent crypto firms. Incumbent crypto firms, many of whom came up on the technology side of the business, will have to adjust to new regulations. This could create a reorganization of the players in the crypto landscape.
“Regulators will catch up over the next couple of years and get ahead of where the new firms are. Firms won't be ready in terms of the infrastructure and the capability to adapt to the regulations in the way that more mature, established, material firms are able to.”
The result? The crypto space, which has been dominated by upstart and standalone crypto projects, could come to be ruled over by the same giant incumbents that dominate traditional finance, according to Richmond.
But advisors can’t afford to wait for the Fidelitys and Schwabs of the world to become the biggest players in crypto.
“By the nature of the guidelines they operate under and the responses they have to be prepared to give to investors, financial advisors are required to maintain a certain level of knowledge of all investments,” Jamali said. “Advisors still need to understand this asset class because it is becoming a notable, if not major, component of overall financial markets – and as we said, it’s not going away.”
Jamali added that he expects an initial, broad slate of crypto regulations to be drafted by U.S. agencies this fall.
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