The flow of institutional money into the nascent crypto industry has long been anticipated by blockchain enthusiasts and holders of cryptocurrency. As Bitcoin began its meteoric rise to an all-time high of $20k in the last month of 2017, even skeptics began to realize the potential that cryptocurrency may hold as an asset. Around the time, Bitcoin futures contracts were made available, although these are derivatives tools marketed to traders and often do not appeal to investors not wishing to make use of leverage.
The elusive ETF (exchange-traded fund) stole the limelight in 2018. Considered a lower-risk investment than the aforementioned futures contracts, ETFs are backed by Bitcoin as an actual asset (representing more than just a gamble on the price) and are anticipated to inject the space with additional liquidity and lower fees than on cryptocurrency exchanges. The industry was abuzz with hype that ETF proposals, the most popular submitted by heavyweights such as the Winklevosses and VanEck, would finally be accepted by the SEC.
It’s looking less and less likely that an ETF proposal will be accepted in 2018 – several were rejected in the month of August. Many seem to believe, as a result, that institutionalization of cryptocurrency is still far off. I’d be inclined to disagree, however – the rejection does come as something of a disappointment, but a bit of perspective is necessary. After all, ETFs are just one financial instrument, and it would be unwise to use them as the sole metric for the reception of cryptocurrency by institutional investors.
I’d go so far as to say that they’re not even the most important development in the space. Certainly, acceptance would indicate a more welcoming stance from regulatory bodies, but otherwise, there’s nothing particularly special about an ETF. More significant, I feel, are the technological developments that reduce counterparty risk and improve security insofar as custodianship of crypto assets is concerned. To these ends, I think DEXs (or decentralized exchanges) are key to building an infrastructure capable of safeguarding institutional funds.
Indeed, I think we need to recognise that traditional exchanges (whether in cryptocurrency or legacy finance) are centralized points of failure – ironically, it’s something that we’ve been trying to avoid with bleeding-edge blockchain protocols. Storing large amounts of cryptocurrency on an exchange is something many strongly advise against, but without adequate alternatives (or seamless transfers from cold storage), it appears to be a necessary evil. Luckily, there’s no shortage of work being done on decentralized substitutes.
With traditional exchanges, there are innumerable factors (both internal and external) that threaten the integrity of users’ funds: whether it’s hacking attempts, regulatory pressure or internal errors, trusting such prolific third-parties with one’s wealth is a risk that can result in disaster (we cannot forget the 2014 Mt Gox hack) the compromise of an exchange that handled upwards of 70% of all Bitcoin transactions).
Conversely, decentralized exchanges know none of these constraints. There's no downtime, no central authority to target and parties are the sole owners of their private keys. It’s worth noting that for large scale investment, custodianship will most likely become a norm, though there’s much less risk in entrusting another party, as opposed to a central trading hub, with coins. Moreover, the use of DEXs allows for a range of next-level functionality, including cross-chain transactions and faster clearance speeds.
Institutional money is waiting to flow into the cryptocurrency industry, but current offerings leave much to be desired. The delegation of trust to centralised exchanges is a major obstacle preventing serious investors from penetrating the burgeoning space, but it’s an obstacle we’re on the brink of overcoming. ETFs are not going to break down these barriers… decentralized exchanges are.
About the Author
Shidan Gouran is President and CEO at Global Blockchain, and the vision behind the Laser Protocol, a blockchain that will allow all blockchains to work together as one big network and at Internet scale.