By David Drake
Cryptocurrencies are becoming essential to the global market. According to KPMG, they are indeed vital, but will take time before they reach their full potential. Currently, the crypto market is primarily speculation-driven as retail investors choose startups based on their ability of their crypto product to add value.
Because of their nature and unpredictability, KPMG suggests virtual currencies will need the input of institutional investors to flourish in future. Institutional investors such as hedge and grant funds are seen as key to contributing to the stability of digital currencies. They are likely to address inequity in the cryptomarket by allowing large volume trading without causing a crash in exchanges as recently witnessed in price drops.
Over the years, institutional investors have steered clear of cryptocurrencies due to their unpredictability. However, as the potential of virtual currencies increases, investors are expanding their asset portfolios to include digital currencies, an aspect that presents new prospects for existing investors. KPMG sees the extensive participation of key industry players such as banks, crypto exchanges and financial institutions as important to enabling the crypto industry fit in the existing financial market.
Even so, regulatory, compliance, taxation, security and infrastructure issues need to be addressed to further enhance crypto currency prospects to institutional investors. There is need for ideal regulations to be put in place to guide operations of the cryptocurrency industry.
Such rules need to be aligned to the distinctive traits of virtual currencies compared to the traditional currencies. The introduction of crypto products will bring transparency and legitimize transactions, and consequently create interest and increase participation of institutional investors.
At the same time, absence of secure infrastructure hinders institutional investor entry into crypto space. Only a few institutions and governments have incorporated secure procedures in handling cryptocurrencies. If Know Your Customer (KYC) standards and Anti-Money Laundering (AML) procedures are not applied in the industry and users are permitted to trade without verifying their documentation, then fraud is likely to occur.
Joseph Oreste, founder and CEO of Qupon says, “I don’t think there is an investment grade distributed ledger yet. I think we are still a couple years out on having enough of a base of technology that institutional investors can get behind to then build the applications that will attract a sufficient consumer base. Regulatory efforts and the associated infrastructure within the crypto space is still lacking.”
In addition, not having measures that identify suspicious activities will consequently lead to loss. But if KYC procedures are outlined by industry players and regulators, they will provide trust and confidence in the crypto market for institutional investors.
Cyber risk is rife for digital assets. Due to their digital nature and value, they attract cyber criminals. Hackers expose networks to loss of vital data and hardware. As such, security measures need to be put in place to ensure safety of data and transactions conducted across networks.
A full entry of institutional investors to the cryptocurrency space means huge trade volumes. It is therefore necessary to identify threats and apply suitable measures necessary to avoid huge losses. Institutional investors may be the change that is needed to stabilize the cryptomarket and measures to guarantee the security of their investments must be put in place.
Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.