How to Build an Asset Class in Three Easy Steps

Kelly proposed breaking down our focus into three key aspects:

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Andy: Neatly arranged. Quite extensive, indeed! Moving on to our first subject: regulatory infrastructure. Given that cryptocurrency is supposed to be decentralized, what makes the United States significant in this context?

Kelly: While cryptocurrencies are inherently global, with users and investors spread across the world, the United States plays a significant role due to its abundance of capital and welcoming business climate. On a global scale, the U.S. is seen as a technological and innovative powerhouse by investors worldwide. A supportive government can only boost this environment, benefiting the crypto sector. In the future, as blockchain technology promotes decentralized trust and governance, societies might start to unite around common interests rather than national borders, breaking down traditional boundaries.

Andy: Regarding projects seeking investor capital from the domestic perspective, it’s indeed challenging without involvement from American lenders and investors. However, in terms of global markets such as trading, derivatives, and services catering to hedge funds, I believe the worldwide crypto market is performing well, considering the challenges. Financial engineering hubs like London, Zurich, Singapore, and Hong Kong, known for their rich talent pools and innovative history, are thriving in this area. While the U.S. has made significant strides with futures contracts on bitcoin and ether, a few ETFs and options, it’s clear that for extensive depth, variety, and novelty, you might need to board a plane.

Kelly: A major obstacle lies in the ambiguity surrounding whether digital assets are considered securities or commodities by regulatory bodies. At present, bitcoin is the only asset with a definitive classification, while other tokens could potentially be seen as unregistered securities. The SEC’s strategy of “enforcement-based regulation” might stifle innovation within the U.S., and it also has far-reaching effects on capital markets. Crypto platforms that focus on exchanging and safeguarding digital assets may find themselves offering unregistered securities, as per the SEC’s guidance.

Andy echoes his recurring sentiment that the back-and-forth between the CFTC and SEC in regulation has been a hassle and obstacle, as evident with basket swaps during Dodd Frank’s enactment 12 years ago, and currently with cryptocurrencies. He reflects on how the SFC in Hong Kong was proactive in establishing regulatory framework for “virtual assets,” recognizing their unique traits and users. Now, VARA in Dubai and MiCA in Europe are following suit, each in their own manner. Most of this regulatory infrastructure is built around traditional assets and exchanges. Your point about the need for a clear pathway for funding and launching new blockchain-based projects is significant.

Kelly: How would you expect indices to be treated in a best-case scenario?

Andy: When it comes to safeguarding investors, indices provide not just varied returns, but also risk reduction. If a single index component falters, it’s replaced, ensuring the index’s survival. While this doesn’t eliminate risk completely, it does minimize the impact of non-systemic failures. We believe this setup offers a practical solution for regulators regarding index derivatives and U.S. ETFs based on indices: if an index is clearly diverse, it might not be necessary to assess each individual constituent individually. If regulators opt for asset-by-asset scrutiny, users may end up heavily invested in just a few assets, even if they are the largest ones, such as bitcoin and ether.

Well, we’ve made our desires clear, but let’s conclude with a positive vibe. We might be growing restless or even agitated, yet there remains optimism in us that the incoming government may foster more favorable regulations towards cryptocurrencies, isn’t that correct, Kelly?

Kelly: It’s crucial to act promptly since other nations are working hard to establish a beneficial setting for developers of blockchain technology. Notably, there are considerable advancements in bitcoin, ETH ETFs, and the CoinDesk 20 index, which provides investors with a wide range of exposure to the crypto market. To maximize the growth potential of blockchain technology and its uses, specialized active management is indispensable to navigate this evolving and intricate field. As venture capitalists focusing on liquid investments, we aim to identify high-potential projects with appealing valuations while keeping a close eye on regulatory and infrastructure changes to minimize any risks unrelated to investment that could influence our returns.

Andy: An challenging path seems inevitable, but I believe it’s coming. By the way, it appears you’ve set up the discussion on active versus passive. I’m excited to dive into that topic!

*Remember: The opinions shared within this article belong to the writer, and they may not align with the perspectives of CoinDesk Inc., its stakeholders, or associated entities.*