Will cryptocurrency be a safe investment?

But FTX is not the only crypto custody test. Last month, a U.S. bankruptcy judge ordered bankrupt Celsius Network LLC to return about $50 million in interest-free assets. But the fate of billions of dollars of user funds stuck in interest-bearing accounts is still in question. Does the money belong to the debtor’s property or to the customer?

This anxiety-inducing uncertainty should be mitigated by moving more cryptocurrency investments onto regular stock exchanges as regular securities, just like stocks and bonds. This puts customer assets under the umbrella of standard safeguards and eliminates the need for costly legal action to recover money. For example, the newly launched CSOP Bitcoin Futures ETF, as pointed out by Bloomberg Intelligence, has its client funds held in a Hong Kong trust company licensed by HSBC Holdings Plc, which is subject to regular bank inspections and audits. consign.

This is what fund managers have been waiting for. Adults in crypto playpens bring adult rules. Who knows if any of today’s digital assets will be more than a vehicle for speculation. However, future tokens may represent meaningful economic value. That premise alone might make it worthwhile to create a safe and secure setup for capital to flow into them now.

Hong Kong’s crypto ETFs are just one of several recent examples of the financial industry looking to offer protection in a legal vacuum. The Bank of New York Mellon Corporation, custodian of $43 trillion in client assets, recently opened a vault to receive cryptocurrencies for some institutional investors. BlackRock Inc. has also joined the fray by adding cryptocurrencies to the Aladdin platform used by pension funds and other large investors to monitor their portfolios. Fidelity Investments, the intermediary arm of a large asset management firm, has provided custody services to hedge funds since 2018.

Olivier Fiennes, London-based head of advocacy for Europe, the Middle East and Africa at the CFA Institute, warns against reading too much into private, industry-level initiatives. “De facto insurance offered by BNY Mellon, Fidelity or HSBC is just a product of their size and scale. New legislation must fill existing legal voids for there to be,” Fiennes said.

One such gap is in the US Securities and Exchange Commission’s Customer Protection Regulations. Under it, broker-dealers are required to separate customers’ cash and securities from their own. This is an important guarantee for clients who part with their money. They would hate to stand in line with common creditors to get their pennies back in dollars if their broker went bankrupt.

But are exchange tokens, such as FTX’s cryptocurrency FTT and Binance’s BNB, security or utility? claims that the FTT is a security. So far, “like other investor protections for digital assets, custodial protections have gone largely untested in court,” said Fiennes and his Washington-based colleague Stephen Dean, an investment manager. We have written a new report outlining the industry’s current views on investing in crypto assets. menu.

“Technology alone, revolutionary or not, cannot provide protection from age-old financial misdeeds, from market manipulation and front-running to fraudulent disclosure and Ponzi schemes,” said CFA Institute. The report states, “The crypto ecosystem urgently needs a strong and well-defined regulatory framework.”

For too long, the focus of cryptocurrency oversight has been on preventing money laundering. Customer protection was not a priority. The pendulum is starting to swing, but it’s probably swinging too far in the opposite direction. In March, the SEC released new accounting guidance for financial firms that are obligated to protect their customers’ crypto assets. They must explicitly record liabilities and corresponding assets. However, if this requirement seems too onerous, it can backfire. Bloated balance sheets drive up banks’ capital requirements and make them reluctant to offer custody services to their customers.

This regulatory tug of war will eventually come to an end, hopefully investors will feel more protected now and intermediaries won’t shy away from this space. The techno-anarchist founders of unreliable blockchain aren’t happy that the same massive intermediaries they wanted to banish are trying to hijack their creations. , future historians of the industry will conclude that crypto’s worst vulnerabilities have crawled out of the woodwork in 2022. After that, the situation gradually improved. Digital assets remained unsuitable for the majority of risk-averse small investors, but at least they have become a safer bet for those who don’t mind volatility.

Details from Bloomberg Opinion:

• Matt Levine’s Money Stuff: Cryptographic Operations Have Consequences

• Beware of the dangers of too much cryptocurrency regulation: Tyler Cowen

• Beware of crypto billionaires who brag about audits: Lionel Laurent

This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. He previously worked for Reuters, The Straits Times and Bloomberg News.

More articles like this can be found at bloomberg.com/opinion.