The positive impact of regulations on cryptocurrency returns

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After being in a state of limbo for several years, cryptocurrency regulation has started to gain significant momentum globally. These developments are a clear indication that cryptocurrencies are not only here to stay but are on a path to becoming part of the world’s financial system.

The relevance of these developments from an inventor’s perspective, in our view, is that with regulations comes huge adoption and investment into previously unregulated markets, as investors (both retail and large financial institutions) have the peace of mind that the financial watchdogs are looking over the conduct of the financial services providers which offer exposure to this investment class.

For information about Jaltech’s Cryptocurrency Basket, click here.

The biggest impact we foresee in the market will come from the banking sector, which will open the cryptocurrency market to billions of their customers through their existing platforms and investment products.

Cryptocurrency regulation state of play

The cryptocurrency regulatory developments have been led by a number of countries including, South Africa, the UK, Europe, the UAE, and the USA. Below is a summary of the state of cryptocurrency regulations within these countries:

South Africa: In October, the FSCA declared that cryptocurrencies would be classed and regulated as a financial asset. The declaration was made on the 19th of October and took effect immediately. The FSCA’s goal is to reduce risk in cryptocurrency investing for investors, something they see as a necessity due to the increase in cryptocurrency asset availability in the local market and demand for crypto assets from South African investors.

USA: President Biden issued an executive order early in 2022 “on Ensuring Responsible Development of Digital Assets”. Following that announcement, several initiatives in the US have been implemented. Two worth highlighting are Senators Lummis and Gillibrand introducing a bipartisan proposal to congress to build a framework for cryptocurrency regulation in America, and the FSOC (a regulatory panel of top financial regulators) recommending that congress pass legislation addressing risks in the cryptocurrency space.

Europe: This year, the European Union signed off on provisional laws that will result in regulations for cryptocurrencies in the region. Known as MiCA (Markets in Crypto Assets Regulation), the bill means a licensing regime will be implemented for crypto wallets and exchanges in Europe. The laws are expected to be formally signed off by the European Parliament in 2023 and implemented in 2024.

United Kingdom: A vote was passed by the House of Commons in October 2022 to “treat cryptocurrencies like other forms of financial assets, and to bring them within the scope of regulation in the UK”. The bill still needs to be passed in the House of Lords.

Dubai: In February this year, the Emirate of Dubai enacted a law on the Regulation of Virtual Assets. The region’s goal is to become one of the leading jurisdictions for cryptocurrencies and digital assets.

For information about Jaltech’s Cryptocurrency Basket, click here.

As well as the above examples, regulatory discussions are taking place in many countries including Canada, Sweden, Switzerland, Germany, Japan, Australia, Thailand, Brazil, Mexico, and South Korea to name a few.

Regulatory impact on cryptocurrency price performance

It is our view that a globally regulated market will drive investor adoption and the performance of this asset class in two ways:

Firstly, a safer investment environment is likely to result in investors feeling more secure. Regulations will reduce the grey areas in which bad actors can operate, and oversight over exchanges and financial service providers will mean they are held to the same standards as the rest of the financial industry, resulting in investors who were previously sceptical of the industry beginning to invest.

Secondly, regulations open the doors for traditional financial institutions such as banks, payment service providers, and institutional investors to enter the market. These institutions have billions of clients and trillions of dollars under management.

  • Banks will soon be able to offer their customers a gateway to investing in the cryptocurrency market using existing bank platforms. These developments are already occurring with the likes of Goldman Sachs and Barclays, which already offer these services to their clients. While Mastercard is launching programs to allow banks to offer cryptocurrency trading to their clients, VISA has already been providing cryptocurrency payment services for over a year.
  • Institutional investors will also be able to invest in cryptocurrencies on behalf of their clients. An example is Fidelity Investments (which manages USD 4.3 trillion), which is preparing to offer Bitcoin to its retirement fund client base. Another example is BlackRock (with USD 10 trillion under management) which recently announced the launch of its Bitcoin private trust.

The impact on cryptocurrency prices when these and other institutional investors allocate as little as 1-2% of their total portfolios will be enormous. It is also expected that this will result in cryptocurrency prices becoming less volatile as institutional investors buy and hold assets over long time frames.

Cryptocurrency regulations are expected to continue to gain traction as governments race to provide a safer investment environment. From an early adopter perspective, investors may experience higher returns by investing in the cryptocurrency market prior to regulations being implemented. We see this as a huge opportunity for investors – arguably, this is the first-time retail investors can invest in an asset class before the large institutional investors, enabling them to front-run the “smart money” and experience asset appreciation in a way that is normally reserved for institutional investors. 

Chris McCormick & Jonty Sacks – Jaltech Fund Managers

Jaltech offers investors exposure to a basket of cryptocurrencies which is selected and managed by a team of cryptocurrency experts.

For information about Jaltech’s Cryptocurrency Basket, click here.

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