The SEC is proposing new rules for the world of alternative assets, that if (or rather when) they come into effect will force investment advisers to store any owned/managed crypto holdings with those institutions that qualify as custodians.
A “custodian” here would be roughly equal to having a registration with regulators as public exchanges or banks.
This is not a completely new development, as the regulatory sentiment has been drifting into this direction for a long time – rather, the FTX debacle has become a much needed catalyzer for regulators to start acting with a more public profile.
But as much as these developments are being antagonized and feared as stifling innovation, I believe crypto is now in the stage of the stock market in the early 20th century, when regulators started cracking down on the likes of bucket shops and other crooks that were exploiting the investment public.
Remember, a registration as custodian does not mean that advisers will have to store managed tokens at banks like Barclays etc. It means that crypto lenders and exchanges have to be independently audited and forced to disclose what they are doing with customer funds.
Effectively, regulators stepping in will provide two massive benefits for the world of crypto.
First, customer abuse and exploitation as in the recent criminal cases of FTX and many before that will decrease, bringing down the likelihood of crypto being considered a scam. Some tokens undoubtedly are, but calling the technology of the blockchain anything but as disruptive as the advent of the internet would be foolish.
Second, the mere need for advisers to store crypto at registered custodians gives this so-far ‘alternative’ asset class more and more the legitimacy of a classical asset. That means, this process will slowly legitimize crypto broadly throughout the population as a valuable asset, and will slowly enable more large institutional players to come to the market place – increasing ownership, liquidity, and reducing volatility, thereby increasing utility as a form of currency.
It is further important to understand that very few crypto-‘currencies’ are actual currencies. Most are akin to software projects with the purpose of applying the idea of the blockchain to various problems that benefit from decentralization. Just to name a few, these include transparent non-manipulatable acounting, document authentication, voting, proof of real estate ownership, whistleblowing, data sharing, or internet server structures … your imagination is the limit.
Regulation will also increase the likelihood of investment funds flowing not just into token ownership but also into the development of such new blockchain projects, leading in my opinion likely to more innovation than exists to date.
Crypto sentiment is still negative overall, and the world of tokens is being decried as “s**t” by venerable investment figures. So far so good – You have to break an egg to make an omelet. Bottoms cannot form without negative sentiment.
