There’s no hiding from the difficult last year the crypto industry has had. It’s been well documented and can be left to others to debate the significance of the blow ups and liquidations that have materialised. That said, it’s a safe wager that few traditional investors will look back on 2022 with much fondness either.
Taking a step back, the direction of travel for the wider digital assets industry is still a positive one. Crypto specifically has come a long way, institutional interest remains high and there are many lessons that have been learned which are being quickly applied by regulators around the world.
To move forward, driving confidence in the asset class and longer-term commitment from institutional participants, regulation is key. It’s very encouraging to see the approach taken by His Majesty’s Treasury in its recent consultation on crypto. It is typically British and typically sensible in its aim of regulating activities rather than the asset class itself.
Whilst there is merit in getting into the weeds on whether crypto should be classified as a commodity or a security, looking to regulate a broad range of activities that surround the asset class, consistent with its approach to traditional finance, seems a prudent first step. Can the application of existing market abuse regulations, anti-money laundering standards and financial promotion rules make a positive impact? Yes. Is there more to do? Undoubtedly.
The elephant in the room is a globally agreed framework to regulate crypto. Whilst in theory desirable, any globally agreed regime would take years and, in any case, is impractical and not required. Capital markets have been operating across jurisdictions for decades, making use of equivalence arrangements and passporting. Just take the FX industry as an example. Innovation in both traditional finance and the crypto sectors moves too fast to sit and wait for any semblance of global regulation to materialise.
When considering what capital markets will look like 50 years from now, LMAX Group views crypto, tokenisation and blockchain technology as the foundation on which everything will sit. There are notable parallels with innovations like derivatives that have driven considerable efficiencies and are a main stay of capital markets. Today, some of the largest exchanges globally only trade derivatives!
The point here is a simple one. A financial system that embraces crypto and blockchain technology will be a more efficient one and a more prosperous one.
It’s worth taking the time to lay the foundations and get the regulatory framework right. Let’s ensure that institutions have the freedom and certainty to trade crypto efficiently. Let’s ensure all bad actors are barred from entering the market, that enforcement is up to the task and that the retail customer has the maximum level of consumer protections available.
Despite a tricky 2022 that was a setback for the industry, we are on the right track. Whilst we can’t say what Bitcoin or Ethereum will be worth next week or next year, in our view, the industry has made great strides and is one we are positive about in the years to come.
LMAX Digital is part of the LMAX Group, an independent operator of multiple institutional execution venues for FX & crypto currency trading.
We've been at the forefront of the institutionalisation of crypto trading since 2018 - with a 100% exchange uptime - ensuring orderly markets during times of the highest volatility.
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© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.