How Close is Crypto to Institutional Adoption?

By Todd Crosland, CEO at CoinZoom

The size and scope of the cryptocurrency industry has increased significantly over the past twelve months. Worldwide crypto adoption jumped by over 800% in 2021 alone – and in the case of El-Salvador an entire nation adopted Bitcoin as legal tender altogether. And more recently, governments in the UK and US have begun setting out their strategies to integrate digital assets into the existing financial system.

While crypto usage is evidently on an upward trajectory in the consumer space, what does its rise mean for the institutional trading market, where cryptocurrencies are also gaining momentum?

Getting comfortable with crypto

The institutional adoption of any tradeable asset is a gradual process that comes with the maturation and evolution of the asset in question. Crypto is no different.

Cryptocurrencies have existed for over a decade now. Like many other industries, decentralised financial instruments may have started out with a focus on individual consumers, but their rise in popularity and usage has left larger institutions with little choice but to begin setting out their strategies on how to integrate cryptocurrencies into their business models.

The result is that institutional investors such as hedge funds and pension funds are getting more comfortable with crypto. According to EY, nearly a quarter of fund managers expect to increase exposure to crypto-related assets over the next two years, while in 2021 alone institutional inflows into crypto markets reached a record USD 9.3 billion – a 36% increase from 2020.

Some of the most reputable institutions are already taking advantage of decentralised financial technology. Goldman Sachs, for example, recently announced that it was offering its first ever Bitcoin-backed loan in a significant expansion of its crypto footprint.

Creating the right environment for crypto to grow

Cryptocurrencies are clearly gaining traction on an institutional level, but this is not to say that they are in the institutional mainstream. Regulation, trust and infrastructure remain a primary barrier to entry for many firms looking to expand their crypto trading offerings.

For institutions to truly boost their exposure to cryptocurrencies, CFOs must ensure they have the necessary controls in place for investors to be comfortable. Greater regulatory clarity is a critical step towards achieving this.

Some in the crypto space virulently oppose regulation, arguing that it would hinder innovation and contradict the very decentralised foundations upon which cryptocurrencies were built. However, rather than a barrier to innovation, the implementation of a clear and well-developed set of rules will be vital towards integrating cryptocurrencies into institutional trading markets. Institutions will ultimately be investing hundreds of millions of dollars into the crypto ecosystem each year, and having confidence in the industry through regulation is key.

The recent crypto ‘crash’ is symptomatic of the broader volatility of the crypto market. It is therefore unsurprising official bodies such as the Federal Reserve and the Bank of England have repeatedly warned consumers that they should be prepared to lose money if they invest in cryptocurrencies.

These warnings have become a reality over the past couple of weeks – and if anything – should serve as the impetus for introducing the regulation needed to make crypto a more orderly and stable marketplace. Failure to introduce the necessary regulatory framework increases the possibility that more cryptocurrencies in the future will experience a sudden drop in value which would result in further losses. 

The amount of operational lift it takes for a fund to get involved in crypto is also not insignificant. Institutional solutions have become more robust, but much work remains for managers in navigating considerations such as valuation policies, compliance, risk management, and fitting crypto into their investment strategies.

Having access to exchanges that are compliant, secure and provide clear and real-time price valuations will be vital in tackling these operational challenges, providing institutions with the toolkit they need to leverage and integrate crypto into their services.

What next?

Further adoption of cryptocurrencies from the institutional community will undoubtedly enhance the development of crypto assets as institutions seek to develop decentralised products for their own investor base. This process is already underway, with increasing numbers of institutions allowing customers to trade, stake, borrow and lend against their digital assets.

However, more institutional adoption will only come with robust and interoperable regulatory frameworks. Trust in partners and products is the single most important factor underpinning any trade or transaction – and for crypto to continue its institutional expansion, effective regulation will be paramount.