What will it take for cryptocurrency to attract the investments needed to fulfil its potential as an asset class, asks Jamie Crawley.
Capgemini’s World Wealth Report 2018 found 29% of high-net-worth individuals were “highly interested” in cryptocurrencies, with a further 27% showing moderate interest.
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Despite its prolonged bear market, cryptocurrency’s integration into the mainstream appears to be increasing all the time. The last month has seen Julius Baer team up with fintech SEBA CRYPTO, and Fidelity launch a Digital Assets arm to service clients’ crypto needs.
Nevertheless, Bitcoin’s 2017 sub $20,000 valuation seems a very long way off and there remain more questions than answers about the viability of cryptocurrency. The first of these is regulation.
“Regulation would give a certain amount of comfort to institutional investors,” says Senthil Ravindran of digital consultant Virtusa xLabs. “There are a number of companies willingly working with the SEC and other regulators so that they can attract these institutional investments, but there is no poster child yet.
“Once we have that success story, crypto could really take off as an alternative asset.”
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By GlobalDataOne keen applicant for this vacancy is Hayvn, a new OTC digital currency platform targeting sophisticated investors. Its founders, Chris Flinos and Ahmed Ismail both see regulation in the world’s most robust financial markets as the key to convincing the unconverted.
Cryptocurrency regulatory arbitrage
“A lot of crypto asset businesses that say they’re regulated aren’t really regulated because they’re just performing regulatory arbitrage,” Ismail says. “A lot of people don’t know the difference between being licensed and being regulated. You might be licensed in a particular area, but is there actually a third party checking the governance of your organisation?”
“These exchanges are focused on themselves and not their end users,” Flinos adds. “If you’re an end user and you want to buy crypto, you want to find an exchange that is regulated in a tough regulatory environment because you benefit from that protection.”
Hayvn is currently in discussions with Abu Dhabi Global Markets (ADGM), owners of one of the world’s only crypto-asset regulatory frameworks, applying to be regulated under their regime as a custodian and broker.
“Regulation entails KYC/AML,” Ismails says, “but it also entails being safe, secure, and trustworthy, which means having appropriate security and technical governance which very few regulators actually know how to solve.
“The ADGM is probably the most advanced crypto-asset regulatory framework, and they’re also in Abu Dhabi – the centre of safety and security in the Middle East.”
The UAE though does not come without its share of problems as a financial centre – it returned to the EU’s tax haven blacklist in March after just over a year off it – so it remains to been seen whether HNWIs and institutions’ minds will be put at rest by ADGM-regulation. For Hayvn though, this only represents Phase One.
“We don’t just want to be regulated there. Our strategy is to be a lot more global, as digital currency is global. Once the FCA begins to regulate cryptocurrencies, we’ll come to the UK.”
The FCA is in the process of setting out regulation and guidance on crypto-assets, which is at present still in the consultative stage.
A safe Hayvn for institutional invesments
Flinos and Ismail met while working at Merrill Lynch, and both found themselves drawn to cryptocurrency as a burgeoning asset class.
“We saw the difficulty for institutional money to flow into cryptocurrency and so we set about solving this by looking at all the problems the most sophisticated investors face,” Flinos says. “We tried to create a platform which removes those obstacles.
“We run very counter to a lot of our crypto-brothers, because we face the institutional side of the market, not the technology side. We’re not a CTO-led firm; we’re a banker-trader-led firm.”
Flinos and Ismail intend for Hayvn to be the regulated and insured platform that institutions can refer their clients to.
“You can’t say to your client, ‘Hop onto Coinbase, and good luck’,” Flinos says. “You client would kill you. It’s all about long-standing relationships in the world of private banking.
“So, we need banks to be able to advise their clients to use the Hayvn platform, making sure that their clients have access to cryptocurrency in an environment that matches their type of regulatory framework.
“You can buy it on our platform transparently, and store it in a regulated environment. You will be giving order to report on your holdings as you would normally expect to in a private bank and we have the liquidity on our platform, to enable you to buy and sell as you need.”
Research and analysis
Along with its reputation as being the ‘wild west’ of investments, cryptocurrency’s attraction is marred by the inherent volatility of its pricing. The deep pockets of institutional investors may address this by providing much needed liquidity. For Hayvn, though, this barrier is a wider one.
“Cryptocurrency is volatile because it’s unregulated, thinly traded, and there’s no quality research out there to give guidance as to how it should be priced,” Flinos sums up.
Hayvn co-founders Ahmed Ismail (l) and Chris Flinos (r)
“There’s very little price guidance for institutional investors to get their bearings on cryptocurrency,” Flinos states. “For example, there are nine to 15 brokers around the world that provide quality research on the correct price of Apple. So, if you want to buy Apple, you can go and download 20 research reports from Bloomberg, each with a price objective.
“And that’s why we’re doing Hayvn Research. We want to be one of a number of impartial investment banking-grade research houses that helps provide an up-to-date price objective.
“If there are five companies doing that, then all of a sudden you start to get a band for where the institutional market believes that people should be trading.”
Hayvn’s research arm is being headed up analyst Ryan Ayache, ex Deutsche Bank, who will also sit on their advisory board.
Still not convinced?
Doubts about Bitcoin go beyond regulation and research, and into such waters as scalability and the sustainability of mining. Still though, it must be remembered that crypto is still in its earliest days as an asset class.
“A great analogy is the internet,” Ismail offers. “In 1995, you had Netscape. Whatever happened to that? Then, in 2000, you had Google, and now it controls every aspect of your life.
“Right now, who knows what the right coin is? We chose Bitcoin, Ethereum and Ripple for Hayvn because they’re the largest in volume. But, in a few years’ time, who knows where Bitcoin might be? It might be the Netscape of crypto or it might be the Google. We don’t have that visibility yet but we know that we’re definitely going in the right direction.”
Flinos and Ismail recognise that there are still a lot of people to convince, not just of the opportunities in trading cryptocurrencies, but that Hayvn is the place to do it.
Flinos says: “We’re not tech nerds. We’re investment bankers and traders who have seen an asset class and recognised a disconnect between the two worlds.
“We need to convince people who already hold crypto and may want to trade it on Hayvn, and we need to convince all the potential new players.
“We’re trying to educate them about cryptocurrency. We need to change the mind-set of the finance world, including all the people who read Private Banker International.”
