Anton Chashchin is a managing partner of the digital asset platform. Bitfrost.io.
The days when cryptocurrencies were reserved for the underground are fast becoming history. But the power dynamics in finance are all too familiar.
As Cryptocurrencies Go Mainstream – Global Adoption 881% up Compared to the previous year in June 2021 – Opinions in the institutional world remain divided.Some financial leaders – like micro strategy – that is to add Skepticism continues to overturn general support for adoption by the general public for their holdings of cryptocurrencies.The recent crash of cryptocurrencies only exacerbates this, and in many institutions back out Promote market irony and irony.
old institutionIn particular, they feel compelled to defend their traditional financial underpinnings against the more radical features of the cryptocurrency movement: decentralization, anonymity, and instability in their eyes.
Institutions facing the challenge of the status quo face a historically unprecedented road turning point, the Thucydides trap.
The Thucydides Trap is a political theory that describes a scenario in which rising power challenges the control of existing power. Dominant forces, when threatened, can become delusional and react in war.
While the original applied to ancient Greece Sparta and Athens, this also applies to the relationship between the crypto industry and financial institutions.
That sentiment is encapsulated by the comments of famous opponents of cryptocurrencies and the embodiment of traditional finance. Warren BuffettWho Said In an interview with CNBC, “Cryptocurrencies are basically worthless and produce nothing. I don’t have cryptocurrencies and I’m not going to do that.”
This paranoia has grown as institutions become aware that the world of cryptocurrencies can create not only competition for them, but even serious threats. The cryptocurrency market is constantly expanding, both in size and sophistication.
Some people accept the rise of crypto as inevitable. Currently, 52% of financial institutions own cryptocurrencies, and recently many financial institutions, including investment banking giants such as: JP Morganlike wealth management stalwarts black rockand a pioneer in infrastructure payments visaand established fintech-like Revolut.
But financial institutions preparing for war need not fall into the trap. Institutions that can put their egos aside and open themselves up to the opportunities inherent in crypto can leverage the rise of digital assets to fuel their own growth.
However, four important changes are needed to promote a fruitful relationship between institutions and the cryptocurrency industry.
1) Strengthening knowledge through third-party expertise
Cryptocurrency is a fundamentally new and evolving asset. In short, financial institutions may find it difficult to keep up with the latest features, especially new entrants.Many people ask the same question a lot: what Bitcoin??What is blockchain?? Is it safe? How can they get involved?
In response to a general lack of cryptocurrency knowledge and competence among institutional investors, Wall Street get together An army of crypto experts with thousands of new crypto jobs in top companies since 2018.
But the demand for knowledge far exceeds the supply.
There is a lot to learn and it is difficult to find the right people to support a pilot project. Not all institutional investors have time to train their staff to successfully enter this area.
Additionally, the current market downturn has forced many crypto companies to lay off employees – the largest US crypto exchange, Coinbase, let go Of 1,100 employees. Top bankers are optimistic that the reduction in this round will expand the pool of crypto talent available and many will return to banks.
In addition, to complement the human resource-focused approach, institutions can seek external support from many third-party companies that have emerged as the institution’s demand for specialized knowledge grows.
Such companies can build crypto services and support companies in integrating crypto into their businesses. Choosing reliable partners and hiring experienced consultants can help institutions realize their crypto ambitions.
2) A Robust and Globally Consistent Regulatory Framework
The pervasive suspicion among organizational leaders is driven, at least in part, by the need to protect customers at all costs. Recent market volatility has heightened suspicions that cryptocurrencies are a scam, or a bubble that could burst, harming clients, businesses, and the wider economy.
Considering each cryptocurrency move is subject to extensive risk assessments, business plans, and board approval, these concerns come to a standstill. passedAnd explain how some companies haven’t taken the first step yet.
In many respects, it’s a legitimate concern. Cryptocurrencies, coupled with the lack of general governance, carry a significant portion of compliance headaches.
International regulation is supportive but extends to the early stages – as in the case of US Securities and Exchange Commission (SEC) and UK Financial Conduct Authority (FCA) – Actively blame – as in the case China, forbidden A completely digital asset.
In addition to this, the crypto ecosystem is evolving rapidly and Regulatory authority To continue. For example, most markets have not yet implemented Bitcoin policies. EthereumNon-Fungible Tokens (NFTs) and decentralized finance (DeFi).
Traditional financial firms have both responsibilities to their clients and strict standards to which they must adhere when it comes to investing and trading, and must remain compliant. This makes us nervous about volatile, undefined and uncontrolled assets like cryptocurrencies.
Crypto may be perceived as a wild and unregulated asset, but perhaps even a risky asset given its recent plummeting valuations. Russiathe recent Invasion of Ukraine shows the opposite, making critical financial services Ukrainian.
Nonetheless, despite the volatility and concerns surrounding the “cryptocurrency winter,” recent reports indicate that investor interest in the sector has not frozen, leading to mainstream digital asset adoption. suggests that the momentum will continue.
Key cryptos as client engagement grows and crypto assets continue to be adopted exchange Other players in the universe are already working with lawmakers on sanctions and other surveillance tools.
This already marks the beginning of the formation of a common regulatory framework that can no longer be denied.
Rather than addressing ambiguity by completely avoiding cryptocurrencies, financial institutions have stronger protection and more robust legal frameworks that allow them to launch their digital assets with greater confidence. Advocacy should be restrained.
3) Dealing with environmental issues
Financial companies are expanding their list of voluntary and mandatory environmental standards to maintain in an increasingly challenging environment. Focused on ESG. Therefore, many institutions are unable to invest in or collaborate with companies in areas that are not environmentally friendly.
research from a European asset manager Candolium In 2021, he argued that cryptocurrencies have a long way to go to meet ESG standards more broadly.
But this is just the beginning of the story. Recognizing the need to reduce carbon dioxide emissions from technology, the market is already energy through other means, such as upgrading networks or offsetting carbon use as some crypto mining companies do. We are starting to investigate ways to reduce consumption.
Some blockchains like Ethereum, which is moving away from the notoriously energy-intensive Proof of Work, are making progress (prisoner of war) model. Transition to Proof of Stake (PoS) mechanism is set to make Ethereum’s carbon footprint more than 17,000 more efficient than Bitcoin.
This should be upheld, but more needs to be done across the industry to offset the impact of cryptography on the environment.
More investment and regulatory-led approaches are needed in this area to balance the ESG scale and enable institutional investor engagement, and institutional investors have a major role to play in driving this forward. can play a role.
4) Increasing awareness of the social benefits of cryptocurrencies
Today, the environmental side dominates the conversation surrounding ESG, but the social and governance side should not be forgotten, as cryptocurrencies are an area of superiority over fiat money.
The basically open source and borderless nature of the blockchain technology in which cryptography is built means that it has the potential to create a more comprehensive and democratic financial system.
Financial institutions looking to gain an edge in the non-environmental arena in the ESG area should keep this in mind.
time of choice
Institutions can choose to succumb to the arrogance of hegemony throughout history and oppose cryptography or form an alliance with rising forces. Many major financial companies have arrived slowly, but the level of paranoia in Thucydidean remains.
As the market expands and the solution and surrounding regulatory ecosystem expands accordingly, institutional credibility can and will increase.
Working with established partners in this area, institutions can take full advantage of the new dawn of cryptocurrencies and step down to the right side of history.
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