The Banking Executive, Issue 155, November 2021

Cryptocurrency nors, compare stable coins to the pri- vate banknotes that were circulated during America’s “free-banking era,” from 1837 to 1862, when any bank could issue its own currency. With regulations porous or nonexistent, the private money was prone to wild price fluctuations and panics. If stable coins are barely regulated, the rest of the crypto market is the Wild West. This is perhaps the most serious impediment to the cryptocur- rency industry’s development. Clear rules of the game are essential if the industry is to attract significant insti- tutional money. As it stands, large institutional in- vestors either shy away from the sec- tor or dabble in it in “venture-capital mode,” investing at an individual- company level. If they are to start re- garding Cryptocurrencies as an alternative asset class – like fiat cur- rencies, commodities, or derivatives – three conditions must be met. First, there must be clean and reli- able data. Here, the cryptocurrency market has made important strides. Although financial information re- mains imperfect and incomplete, many data providers now go beyond pricing data, at least for the largest Cryptocurrencies. Key players in the traditional finance sector – such as the S&P Dow Jones, with its Digital Market Indices portfolio – provide an important methodological bench- mark for constructing such data and ensuring its credibility. Second, we need research that facil- itates a deeper understanding of Cryptocurrencies as an asset class. Academic research has underpinned the creation of a number of new asset classes, such as derivatives and index funds, not to mention invest- ment approaches like factor invest- ing. Now, important progress is being made on Cryptocurrencies. The third condition is a credible reg- ulatory framework. As it stands, such a framework remains nascent, not least because regulating Cryptocur- rencies presents significant chal- lenges. Some are conceptual and require the development of new the- ories, or the modification of existing ones, in accounting and law. Others are practical: for example, while the records of all transactions are public, the identities of the parties executing the trades are difficult or impossible to ascertain. And virtually all of these considerations are global, meaning that regulators in most major coun- tries (at least) will need to coordinate their oversight efforts without stifling innovation. Once these challenges are over- come, and an effective regulatory framework is put in place, Cryp- tocurrencies will come of age. The attention-grabbing, experimentation- heavy teen years will be followed by the establishment of a more pre- dictable version of the crypto market in which Cryptocurrencies represent a credible asset class. the BANKING EXECUTIVE 20 ISSUE 155 NOVEMBER 2021