What Is Keeping Financial Institutions From Going Crypto?
A lot of investors are expecting big financial institutions to soon join the crypto world, and are preparing themselves for the occasion. However, the waiting continues, which has caused many to ask what barriers are there before institutional investors go full crypto?
The crypto sphere seems to be on yet another rise these days, with a lot of progress being done to increase trust in digital currencies around the world. As part of this development, large investments and support for cryptos from financial institutions are expected as well. If they choose to join the crypto world, the market could see trillions of dollars coming to the crypto market.
However, this event continues to be delayed, and many are wondering why that is. What barriers are there that are preventing direct institutional investments?
The Reasons Why Institutional Investors Mistrust Cryptos
One of the biggest reasons why the financial institutions are still hesitant to join the crypto market is the regulatory hurdles. They are preventing direct investments for several reasons, like the legality of various coins. Despite the fact that the SEC has decided that Bitcoin (BTC) and Ethereum (ETH) are not securities, a lot of other coins still aren't in the clear yet. Due to these risks, which might lead to federal prosecution, institutions are not ready to go crypto just yet.
Another reason is the fact that crypto/fiat custody still remains to be a work in progress. Basically, these institutions are not too keen on giving custody of bigger crypto amounts to exchanges, since they like to keep track of their funds. Having their money insured, secured, and properly stored is the top priority for these institutions, and they would much rather see their money in cold storages, where it would be safe and protected.
Next, there is a large risk involving counterparty. Despite the fact that the security of crypto exchanges has come a long way since some of the famous hacks, there were still too many of them recently to make security a certainty. Obviously, exchanges still have a long way to go before they could claim to be as safe as these institutions would want.
Another reason why financial institutions are hesitating to join the crypto world is the liquidity of cryptos. To this day, liquidity remains low, especially when it compares to fiat currencies. For example, the New York Stock Exchange sees over $50 billion in trading volume on an average day. Not to mention the average daily volume of USD/EUR being at around $575 billion.
Compared to these numbers, crypto trades seem to be nearly insignificant, which does not sit well with institutional investors. In order for them to join in on the crypto game, digital coins trading will have to become much more active and attractive.
Finally, there is the matter of AML and KYC regulations, which need to be more strongly imposed on these exchanges. Traditional exchanges are much more advanced when it comes to this, which inspires financial institutions to stick to traditional currencies. If this is to change, the crypto exchanges need to prove that they are capable of protecting their investors from market manipulation and dirty price formations. Also, the exchanges need to comply with modern financial regulations, which may be their biggest challenge.
Additional Negative Aspects To Going Crypto
In addition to all the reasons mentioned already, there are also some cultural barriers that need to be breached in order for institutions to consider entering the crypto world. Cryptos are a young and relatively recent phenomenon, being around for only a single decade. Despite all of their success, they are still too young and unexplored for mainstream acceptance.
This has caused only the bravest and most adventurous investors to join the crypto market. As long as the sector is not properly regulated and protected, the largest investors, and their largest amounts of money, are not planning on joining in. Things like unethical trading, fraud, and alike simply pose too big of a risk for them to feel comfortable joining the market.
There is also the matter of the person's ability to understand this trend, which has mostly been on the side of younger investors. The older individuals are not so trusting towards these new technologies. Not to mention the rather radical language that a lot of crypto founders are using, which leaves institutions and banks uncertain, and is even seen as off-putting.
With all of this in mind, it is clear that talking won't make much of a difference anymore. Instead, cryptocurrencies and crypto exchanges will have to prove their potential and inspire confidence by deeds. As the time goes by, cryptos are making a difference, and are certainly moving forward in their goal to reach mass adoption.
However, this is a long process, and cryptos have already made an astounding amount of progress, considering how young they are. Only a year ago, the situation was a lot different than it is today, and five years ago, questions such as this were nearly unimaginable.
As mentioned, cryptos are still very young, and it takes time to achieve what they wish to achieve. In time, and with additional progress, they will get to the point where banks and institutional investors are comfortable with them. Until then, however, the fight continues.