FinTech Horizons

Karen Padley is News Editor at Fintech Horizons Media. She has been a business journalist for more than 30 years, and has written for Bloomberg, Reuters, Mergermarket, Investor's Business Daily and others.

Recent price declines in bitcoin and other cryptocurrencies won’t hurt the outlook for blockchain development, according to a panel discussion Saturday at the Voice of Blockchain conference in Chicago.

“It’s helpful to have prices going up but it’s definitely not correlated,” said Colleen Sullivan, CEO of CMT Digital.

Added Jim Radecki, head of business development at DRW’s Cumberland, “To me, cryptocurrencies are just prices that go up and down. But the efficacy of the technology is undeterred by that.”

He and others said there needs to be wider adoption of digital currencies.

“This is the only asset class that we’ve ever seen where the price action in the underlying (asset) has outpaced the infrastructure buildout in the ecosystem by years,” Radecki said. “Prices clearly got ahead of usage.”

Institutional investors also are concerned about several issues including access to liquidity, custody and security, the lack of fundamental research and regulatory uncertainties.

The last factor is a major hurdle, the panelists agreed. Sullivan noted that four U.S. regulators all have taken a different approach.

“In 2013, FINCEN said it was a currency. In 2014, the IRS said it was property. In 2015, the CFTC said it was a commodity. In 2017, the SEC informally said it’s not a security,” she said. As a result, Sullivan said, someone who used bitcoin to buy coffee at Starbucks could theoretically be required to report a capital gain or loss to the IRS.

“Clarity is what will get institutions in the market,” commented Kyle Tuskey, COO of Deep Systems.

Radecki said his company is “putting boots on the ground” in parts of the world where regulations are being developed. He said Cumberland wants to become part of the process “as opposed to either chasing it or – even worse – being chased by it.”

The regulatory confusion has broader implications for the U.S., Sullivan said. “If we don’t get some clarity here, we will not participate in this new asset class like we did in the Internet,” she said.

Investors already will often hear American accents when talking with portfolio company representatives in Singapore and Switzerland, according to Sullivan. “They’ve moved to jurisdictions where there’s regulatory certainty,” she said.

The SEC staff decided last week to reject bitcoin ETF applications from several firms, a decision that will be reviewed by the agency’s commissioners. Panelists said they remain optimistic that these will eventually pass regulatory muster.

“it’s just a matter of time, getting the infrastructure in the markets ready for that to happen,” said Peter Johnson, vice president of Jump Capital. “It will be a really meaningful thing for the industry because it’s going to allow a lot of new capital to come into the market.”

Radecki noted such product already being traded in Europe are already being listed in U.S. dollars. “I think there will be increased pressure to ramp them up as soon as possible,” he added.

All of the panelists said they are encouraged about the industry’s long-term prospects given the influx of executives from more established companies like Google, Facebook and LinkedIn.

“The smartest people we all know are coming in and starting companies and joining companies,” Johnson said. “That is the real indicator of where this space is going.”

Radecki, who left a position as a managing director at Goldman Sachs, in 2016, agreed. When he announced he was retiring to join a cryptocurrency firm, he said he received emails along the lines of “Somebody buy him a convertible. He’s having a midlife crisis.” A few years later, he said, those same people are asking “Hey, can you help me get into this too?”

“It will be a lot of the seasoning and business experience of people from the traditional capital markets blending together with brilliant computer scientists and technologists…that will put this movement on steroids,” Radecki said of blockchain.

Tuskey agreed that the addition of executives from large institutions will have an impact in the coming year. “2019 will be the year we go beyond crypto as digital assets,” he said. That will move the industry’s emphasis from one largely geared toward retail and make it more institutional.

“It won’t be quite as exciting, have less exuberance,” he said, “but it will build out the foundations of what it needs to be in the future.”