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Portfolio > Alternative Investments > Cryptocurrencies

Regulation Is Key to Wide Adoption of Crypto: S&P Global Ratings

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What You Need to Know

  • Regulators are key to expanding the market for cryptocurrencies.
  • Eyes are on the SEC for possible approval of a Bitcoin ETF.
  • Questions remain about volatility and speculation, illicit uses, energy consumption and demand.

Regulation and greater public confidence are keys to the broad adoption of Bitcoin and other cryptocurrencies, according to a new report from S&P Global Ratings.

The report notes the “wave of excitement about cryptocurrencies in general and Bitcoin in particular, which have become more acceptable as investments or as a means of payment,” but also the limits imposed on their broad-based use due to the lack of new regulations and the  excessive price volatility.

Until there is more regulation and greater public confidence, S&P Global Ratings analysts expect cryptocurrencies will “continue to be speculative instruments, which investors mostly use as a store of value rather than a means for commerce.”

Current Regulation

To date, the U.S. Office of the Comptroller of the Currency has ruled that national banks and federal savings associations of all sizes may provide custody service for crypto assets, participate in public decentralized networks and accept stable coins to settle payments.

The SEC is letting special purpose broker-dealers custody digital assets, under certain conditions, while it solicits comments on “evolving standards and best practices” for the custody of digital asset securities.

And the Commodity Futures Trading Commission has approved the trading of Bitcoin futures contracts while also declaring that cryptocurrencies are commodities.

In addition, central banks around the globe, including the Federal Reserve, are considering issuing central bank digital currencies (CBDCs) as means of payment, not as investments.

Once CBDCs are established, S&P Global expects to see their large-scale adoption, rather than that of private digital currencies, as a means of payment. In the meantime, Visa, Mastercard, PayPal and Tesla have plans to accept Bitcoin as payment on their platforms. Tesla has also invested $1.5 billion in Bitcoin while MassMutual, a more traditional financial firm, has invested $100 million.

Will the SEC Approve a Crypto ETF? Canada Has

Proponents of cryptocurrencies in the U.S. are now focused on whether the Securities and Exchange Commission will approve a cryptocurrency ETF. It has rejected past applications, but two are pending before the agency: the VanEck Bitcoin Trust and the NYDIG Bitcoin ETF.

Several SEC observers expect that the SEC under Gary Gensler, President Joe Biden’s pick for chairman who has yet to be confirmed, will be more amenable to approving a cryptocurrency ETF than was his predecessor, Jay Clayton.

Gensler is a former chairman of the CFTC and currently a professor at MIT, where he teaches and researches blockchain technology, digital currencies, financial technology and public policy and is a senior advisor to the MIT Media Lab Digital Currency Initiative.

Canada has already approved two Bitcoin ETFs, which trade on the Toronto Stock Exchange and are priced in Canadian dollars, and a third will reportedly start trading soon. “Traditional asset managers are becoming more open to the idea of investing in cryptocurrencies or in taking positions,” according to the S&P Global analysts.

What Major Asset Managers Are Offering

BlackRock recently announced that Bitcoin derivatives registered on commodity exchanges will become eligible investments for a couple of its funds.

Fidelity Investments launched its first Bitcoin fund, Wise Original Bitcoin Index Fund I, in August for accredited investors and in December it announced that its digital assets platform, formed in 2018, lets clients pledge Bitcoin as collateral for cash loans.

Fidelity has been offering custodial services for cryptocurrencies for several years through its Fidelity Digital Assets platform. More recently, Bank of New York Mellon, the nation’s oldest bank, announced it is developing a multi-asset digital custody and administration platform that will accommodate both digital and traditional assets.

Schwab allows approved clients on its futures platform to trade CME Bitcoin futures and allows clients to trade over-the-counter trust products such as Grayscale’s Ethereum (ETHE) and Bitcoin (GBTC) trusts.

Assets in the Grayscale Bitcoin Trust increased $2 billion in 2020, according to S&P Global Ratings, and late last year the Bitwise 10 Crypto Index Fund, a statutory trust, debuted, followed by the launch of SkyBridge Bitcoin Fund, a limited partnership, early this year. Bitwise is looking to launch a Bitcoin Fund, similar to its crypto index fund, but focused on the single cryptocurrency.

Questions Remain

Momentum is clearly growing for investments in cryptocurrencies, but questions remain about customer protection, both privacy and security; about compliance with tax law; the volatility of the cryptocurrencies themselves; and their fossil fuel footprints, according to S&P Global Ratings. Its report notes that Bitcoin and other cryptocurrencies consume as much electricity as the Netherlands and the United Arab Emirates, according to the Cambridge Bitcoin Electricity Consumption Index.

Treasury Secretary Janet Yellen has said Bitcoin is “highly speculative” and inefficient in conducting transactions, and has raised concerns about its use in “illicit” activities.

S&P Global Ratings also points out cyber risks, citing the hacking of a New Zealand-based crypto exchange and suitability concerns, which caused regulators in the U.K. to ban the retail sale of derivatives and exchange-traded notes based on cryptocurrencies.

“Bitcoin and other cryptocurrencies will have to overcome their technical and nontechnical weaknesses including lack of regulatory support, to thrive,” according to S&P Global Ratings.

“Until cryptocurrencies become mainstream and adopted by a critical mass they will still be speculative and could blow up,” said Tim Welsh, founder, president and CEO of Nexus Strategy. If cryptocurrencies, however, do become mainstream, Welsh expects big financial firms will respond, rolling out cryptocurrency-linked solutions that they can cross-market to tens of millions of customers.

Asked about plans for cryptocurrency custody or brokerage services, a Schwab spokeswoman said, “We will continue to listen to our clients’ feedback to make sure that our offering meets their needs.”

(Image: Shutterstock)


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