Beyond liquidity, what do institutions bring to cryptocurrencies? What exactly is their added value? This is an instructive question to ponder, as there is little consensus on what deeper institutional involvement means for an industry fraught with contradictions.
The long wait for the approval of a Bitcoin ETF, allowing pensions and funds to invest in BTC, is likely to prove to be a positive catalyst for industry growth. But in focusing on price action, observers are missing the real benefits of large-scale institutional adoption. Perhaps the biggest benefit of deepening institutional adoption is the regulatory certainty it brings.
Tax and Compliance
In many areas, agency involvement forces regulators to provide direct answers. Chief among them are tax and compliance. What transactions can a business legally engage in, how should these transactions be disclosed on the balance sheet, and what steps must be taken to report these activities?
related: Bitcoin ETF: Cryptocurrency’s $600B tipping point
Determining what constitutes a taxable event in cryptocurrency depends on your jurisdiction. While U.S. traders are required to calculate profit and loss (PnL), perps positions, and on-chain events for every trade on a decentralized exchange (DEX), other countries take a less stringent approach, and some don’t bother to impose taxes Not at all.
#bitcoin ETFs to be delayed until final deadline
Even though both the SEC and BlackRock knew the inevitable outcome, the SEC tried to show they were not interested and tried to push the date back to the deadline.
BlackRock’s ETF should be the first… pic.twitter.com/6ZkfUf9WPR
— Mags (@thescalpingpro) September 29, 2023
No matter where you live, determining your obligations when buying, selling, and storing digital assets can be a headache. But it could be worse: imagine how much risk businesses face, with their public accounts having to be scrutinized and often requiring permission to include Bitcoin (BTC) on their balance sheets.
Businesses set higher standards for compliance, disclosure, reporting, and taxes than consumers do, and for good reason. This is the main reason why it took so long to get serious institutional adoption. But as financial firms gained a foothold in the field and became a torrent, the lawyers and lobbyists that followed began to pay dividends. When BlackRock started touting a Bitcoin ETF, even the U.S. Securities and Exchange Commission (SEC) had to take notice.
On August 29, the court ruled in favor of the SEC against Grayscale, demonstrating that the powers that be can come together to force regulators to renegotiate. The precedent set by this appeals decision will further strengthen agencies’ confidence in their ability to rewrite legislation in their favor.
Seeking regulatory clarity
For those already involved – sole traders, trading companies, family foundations, venture capitalists – more institutional involvement can only be a good thing. When the largest institutions decide to join, it forces regulators to cooperate. Not all provisions that pass regulations will help the industry – some are just silly – but in general they provide something that has been missing for years: clear.
Is Bitcoin a security? What about Ethereum (ETH) or Solana (SOL)? Currently, the answer depends on who you ask. Some agencies appear intent on declaring everything but Bitcoin a security; others are taking a more cautious approach, focusing enforcement efforts on the most egregious token sales and shills.
Related: 10 Years Later, Still No Bitcoin ETF — But Who Cares?
Institutions cannot trade assets in a regulatory no-man’s land: they need black and white, not gray areas. Their increasing participation in the market is bound to provide clearer answers on cryptocurrency classification, which will benefit the entire industry.
Additionally, greater institutional involvement is legitimizing digital assets, making those responsible for regulating them less unfamiliar. Cryptocurrency opponents cannot legitimately claim that the industry is a hotbed for money laundering and laundering when its most active players include the world’s leading trading firms.
Signs of Institutional Adoption
Today, businesses and governments are vigorously promoting blockchain-based initiatives, such as CBDC pilots. In Asia alone, central banks in Hong Kong and Japan are exploring plans involving digital currencies.
Meanwhile, banks from the United States to Europe are launching cryptocurrency custody and trading services for their clients. In August, Europe’s first spot Bitcoin ETF was listed in Amsterdam, proving that institutional willpower can finally get things done.
Regulators and institutional players are still catching up in terms of expertise from those who built the industry from the ground up through hands-on involvement in the early days. No one can fully grasp it. But as a rising tide lifts all boats, greater institutional involvement will bring benefits to all involved, from the humblest farmer to the richest whale. Don’t assume that any one group has solved all the problems, open and collaborative dialogue is most likely to lead to positive outcomes. Regulators, agencies and early adopters each provide unique insights.
You don’t have to thank them, but large institutions are a positive for the industry. Bigger players create better rules and produce better results for everyone.
Gracie Chen is the Managing Director of cryptocurrency derivatives exchange Bitget, where he oversees market expansion, business strategy and corporate development. Prior to joining Bitget, she held executive positions at Fortune 500 unicorn Accumulus and venture-backed VR startups XRSPACE and ReigVR. She is also an early investor in BitKeep, Asia’s leading decentralized wallet. In 2015, she was named a Global Shaper by the World Economic Forum. She graduated from the National University of Singapore and is currently pursuing an MBA at MIT.
This article is for general information purposes only and is not intended to be, and should not be construed as, legal or investment advice. The views, thoughts, and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.