FFinancial advisors may soon not only get the regulatory clarity they’ve been asking for on cryptocurrencies and investing in digital assets, but also have a timeline for when that will happen.
Last month, US President Joe Biden issued an executive order calling for a coordinated effort by federal agencies to research and report on digital assets within 180 days.
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“I think this is extremely positive because it takes the conversation from normalizing crypto assets to how they will be normalized,” said John Sarson, CEO of Sarson Funds, a crypto asset manager and service provider. ‘education. “It removes any doubt about the normalization of crypto assets, and it even gives a deadline to do so: 180 days. In the next 180 days, we will have a framework for crypto standardization. »
A generally positive reaction from the industry
Sarson was perhaps the most positive of a seemingly unanimously positive response from people working in the institutional crypto market and crypto for advisors.
Ryan Louvar, legal counsel and head of business and legal affairs at asset manager WisdomTree, also praised the purpose and tone of the order.
“It didn’t really provide any particular clarity, but it at least started to set the stage for these agencies to work together for clear regulation of digital assets,” Louvar said. “It demonstrates that the US government views digital assets and blockchain as an important part of the global economy, which I found remarkable, and it has led a number of government agencies and inter-agency cooperation from thorough way.”
The order asked federal agencies to consider crypto because it intersects with seven issues: consumer and investor protection, U.S. and global financial stability, illicit finance and national security risks, U.S. leadership in technology and economic competitiveness, access to affordable financial services and support for responsible technological development. .
The good and the bad
The executive order may be less about what content agencies are asked to review than about how they will conduct their reviews, said Adam Blumberg, co-founder of PlannerDAO and Interaxis, a company that teaches crypto to financial advisers.
“I like this idea of a coordinated government response and effort between different government agencies, the idea that they have to tie themselves to these assets and understand what they are and how they affect all these different aspects of the financial system and how to make it safe for everyone,” Blumberg said. “They have to regulate different entities and agencies, yes, but they also have to try to do it in a consistent way so that we don’t have the [U.S. Securities and Exchange Commission] go one way and [Commodity Futures Trading Commission] goes another.
The United States now regulates cryptocurrencies in a mostly uncoordinated approach that overlaps multiple agencies, each with its own definition and treatment of the asset class, all of which rely on inconsistent state regulations, said Blumberg.
While Blumberg is happy to see an executive order acknowledging the economic importance of digital assets, he also sounded a cautionary tone. Federal agencies are made up of career civil servants and political appointees, and so the outcome of an agency’s search will likely be geared toward some type of political goal and biased towards granting more power to an agency.
“Part of the idea of crypto and DeFi (decentralized finance) is to take some of the financial power out of the hands of the government. Why would you expect someone in government to say, “Yeah, we’ve been doing too much for a while and we have to give up trusting the computer code that can process transactions for us?” Blumberg said. “It is not in the interest of the government or people employed by the government to do this.”
For advisers and traditional investors, Blumberg sees the executive order as a victory, as it should provide some of the clarity they seek. But for some investors deeply invested in digital asset culture, decentralization and pseudo-anonymity are popular concepts, and the new regulations are likely to be daunting.
A path to a bitcoin ETF?
For asset managers like WisdomTree, the research required by the executive order may help push the SEC to eventually approve a spot bitcoin exchange-traded fund, paving the way for more crypto products for advisors and investors.
“One thing we’ve heard quite frequently is that clients are approaching and investing in this space away from the advisory relationship, which undermines the ability of advisors to provide consistent holistic advice to their clients,” Louvar said. “One of the ways they’re looking to bridge the gap is by using regulated products to provide access, like a spot bitcoin ETF, which we’ve seen in overseas markets, but not in the US. I don’t I don’t know if this framework will accelerate the approval of a spot bitcoin ETF, but hopefully this helps.
The timing of the executive order is fortuitous for incumbents in the digital asset industry, Louvar said. The battle for a bitcoin ETF and other crypto regulatory approvals has given the digital asset industry a boost in its lobbying power.
According to consumer advocacy group Public Citizen, the cryptocurrency industry quadrupled its spending on lobbyists, from $2.2 million in 2018 to $9 million in 2021, with the number of lobbyists representing the industry having nearly tripled over the same period, from 115 to 320.
Of course, that’s a very small fraction of what the mainstream financial industry spends on lobbyists, but it’s a testament to an accelerated engagement effort from a corner of the financial universe not known for wanting to embrace traditional institutions or power structures.
So what comes next?
The final outcome of the review is not yet clear. The general consensus seems to be that some form of new regulation will stem from this effort, with some industry players believing that a new government agency dedicated to the asset class will be created.
“I think we probably need a dedicated crypto agency; it’s a new asset class that’s not really a commodity, or a stock, or a currency — it shouldn’t be regulated by the CFTC, SEC, or FinCEN,” Sarson said, making reference to the Treasury Department’s Financial Crimes Enforcement Network.
“It would make sense for it to take a few years and a few iterations to get there, but it took a long time from 1929 to put in place the Adviser Act of 1933 and then the Adviser Act of 1940,” said he declared.
All told, it’s a sign of a maturing asset class, said Ben Cruikshank, CEO of Flourish, a crypto asset management platform for advisors.
“The result will be that crypto looks and is increasingly treated like other assets, from anti-money laundering and know-your-customer protections to consumer and investor protections,” Cruikshank said. “This applies to advisors trying to take a crypto-compliant approach and ensure providers are on the first side of regulation. That’s not a deterrent to bringing more advisors into the crypto fold, it’s confirmation that the industry continues to mature.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.