How Institutional supports changing cryptocurrency industry

The random ups and downs in the prices of cryptocurrencies have been mainly attributed to two factors which are decentralization and lack of regulations. Even though these two factors are also responsible for the growing popularity of cryptocurrencies among investors who prefer privacy and lack of government control, but a big chunk of institutional investors have kept away from investing in cryptocurrencies because of lack of clear regulations related to it.

ICOs (Initial Coin Offerings) have become a new alternative among companies looking to raise capital. It has provided the potential to tap into a liquid market without going through the extensive paperwork and norms which are required during IPOs (Initial Public Offerings). Unlike stocks and commodities, which are regulated by dedicated bodies, the investments in cryptocurrencies are mostly based on the trust which the specific cryptocurrency based project is able to generate. Not only new companies but even established and well-known companies have raised money through ICOs, for example, Filecoin raised $257 million and Telegram raised $1.7 billion previously through the ICO route.

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Some institutional investors have been investing in cryptocurrencies which is a positive sign for the cryptocurrency sector, however, lack of clear policies and framework has been quoted as some of the major barriers when it comes to big investing groups. The sharp increase in prices of various cryptocurrencies a few months ago has attracted many investors, but even those investors who have invested in cryptocurrencies have taken very calculated steps because of the randomness and lack of institutional control over it. If doubts related to the future of cryptocurrencies in this sector are contained, then it can lead to an exponential growth in cryptocurrency investments.

The growing number of utility coins launched by various entities can also witness a faster growth if more and more institutional investors start investing in cryptocurrencies. As the cryptocurrency ecosystem in intricately linked, hence many altcoins can see a growth in their market size if institutional investors take a greater interest in investing in cryptocurrencies.

However, some big institutions have been showing interest towards cryptocurrencies, for example, Goldman Sachs started a cryptocurrency trading desk in May 2018. Similarly, Intercontinental Exchange, Inc. (ICE) announced to provide a cryptocurrency data feed. Intercontinental Exchange, Inc. (ICE) is the parent company of the New York Stock Exchange and hence announcements made by it related to cryptocurrencies can pave a way for greater interest towards cryptocurrency investments. Even though the cryptocurrency sector has got less investment from big institutions earlier, but the recent trends can provide a game-changing shift for the entire cryptocurrency industry.

For Institutional Investors

Some cryptocurrency developers welcome this change as they believe that announcements and interest shown by big institutions will have a positive effect on cryptocurrencies because this trend will lead to greater acceptance of cryptocurrencies. It is believed that greater focus from institutional investors will lead to proper regulations which would clear the doubts related to cryptocurrencies and it would also be able to tackle several issues related to cryptocurrency investments in a more efficient way. Apart from this, it would strengthen corporate governance in companies raising funds through ICOs which would mean increased accountability and trust.

“Announcements and interest shown by big institutions will have a positive effect on cryptocurrencies because this trend will lead to greater acceptance of cryptocurrencies.”

Against Institutional Investors

However, some people are against big institutional investors as they argue that it could destroy the core idea of cryptocurrencies. They argue that such institutions can become the new intermediaries for cryptocurrency regulation which would defeat the process of decentralization and transparency.

Role of Government Regulators in Determining Institutional Support

On one side where the number of ICOs are increasing day by day, the SEC (Securities and Exchange Commission) has expressed its concern over the growing potential of fraud. However, supporters of cryptocurrencies argue that such cases should be taken as exceptions as the cryptocurrency sector is evolving over time and many cryptocurrency exchanges have started following KYC norms for its users. It is also important to note that people are becoming more aware regarding cryptocurrency investments due to the upsurge in the number of websites related to altcoin analysis and reviews.

One core issue for regulators will be to balance investor protection without making it too complex for companies to raise funds for their innovation needs. Currently, the regulatory environment for cryptocurrencies across the world is divergent because of the lack of coherent view related to it. While countries like Japan have adopted a more favorable approach, China is strict on cryptocurrencies. Since ideas and initiatives related to cryptocurrencies are not confined within the traditional political borders, hence the absence of a uniform view across different countries can hinder its potential.

Many government regulators across the world do not know how to classify ICOs which further raises confusion related to its taxation. Since the amount of money invested in cryptocurrencies is growing over time, hence governments across the world are looking to bring it within the ambit of taxes. However, due to the anonymous nature of transactions involved in cryptocurrencies, bringing cryptocurrencies within the taxation regime would not be as simple as it seems to be.

When it comes to the confusion related to the classification of ICOs, some experts label it as an entirely new asset class. They argue that even though some tokens function like securities, but the “utility tokens” cannot be simply classified as equivalent to securities because apart from their value as an investment, they also serve non-monetary purposes. For example, Ethereum’s Ether (ETH) token is a utility token as it is used by developers to come up with solutions in many sectors like finance, advertising, etc.

Since tokens can simultaneously work across many categories, hence its rigid classification as a “security” would not suit it. This confusion related to cryptocurrency tokens also makes it difficult for taxation. Hence, a legal vacuum exists in the case of cryptocurrencies because the traditional definition of investment and security do not effectively represent it. It will be interesting to see the changes which the cryptocurrency sector would witness owing to the pull and push factors from various interest groups. Overall, it can be said that cryptocurrencies are slowly gaining more acceptance from big sectors of the economy and this trend is likely to bring in a better future for the growth of cryptocurrencies.

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“Since ideas and initiatives related to cryptocurrencies are not confined within the traditional political borders, hence the absence of a uniform view across different countries can hinder its potential.”