Crypto’s “Frontier Market” Needs Clearer Laws, Says U.S. Fund

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The cryptocurrency ecosystem currently faces three critical issues: a lack of liquidity, thriving criminal activity, and the spread of misinformation. These barriers prevent crypto’s jump from a frontier market to an emergent one.

Upon closer investigation, however, these are just symptoms of the lack of clear laws.

Crypto and Frontier Markets

Large institutions, in particular, have been on the sidelines for an extended period, waiting for regulators to chime in on the cryptocurrency discussion. 

Agencies have been a part of the discussion, but there is little coherence in the direction they have taken thus far. Few jurisdictions offer a clear regulatory framework for digital assets or have laws in place related to crypto. This had led to three distinct problems including, a lack of liquidity, the rise of malicious actors, and the dissemination of unreliable information.

Strix Leviathan, a Seattle-based cryptocurrency hedge fund, believes these issues are shared by all frontier markets. A frontier market is a small developing market that is rife with opportunity but hasn’t earned enough recognition to be called an emerging market. Successfully overcoming the barriers mentioned above would help crypto make the jump. 

Lack of Regulation Bars Liquidity

Crypto’s liquidity problem is evident and can aptly be tied to immature regulation. 

Most institutional funds will not put their client’s money into an asset class that local governments can ban on a whim. Even if such funds saw an opportunity, their prime concern is the preservation of funds. This focus often leads to institutions tabling money in exchange for legislative clarity.

Hypothetically, if a large government decided they were going to regulate cryptocurrency investing and introduce a detailed framework for doing so, it could serve as a catalyst for institutional money to enter the ring. This has long been the hope for many in the space.

Consider Bitcoin, which is, by all means, a liquid market and boasts multi-billion dollar transaction volumes on a daily basis. Bitcoin’s liquidity comes from its brand image and longevity. One could describe Bitcoin as a market that used its massive price appreciation to bootstrap liquidity and generate attention.

Unfortunately, this isn’t a sustainable model for building liquidity. Eventually, most projects require capital to build something truly monumental. Even Bitcoin, the cryptocurrency that started it all, needs a boost to enter the mainstream.  

Circling back, it becomes obvious that regulation, or the lack of it, is a prime concern for institutional investors who could otherwise fund infrastructure development within the ecosystem. 

Bad Actors, Bad Information

In November 2019, hackers stole 342,000 ETH, or $50 million, from the South Korean exchange Upbit. Regardless of rumors that the event was an inside job, regulators were nonetheless slow to react.

If these same hackers stole $50 million from a bank, financial regulators would scramble to mitigate the destructive side effects of the event. Financial laws are clear cut and easy to act on.

Criticism from the crypto community thus stems from the idea that victims in both bank and crypto exchange hacks are citizens or residents of a particular country. In their inaction, regulators revealed that this might not be true.

The discrepancy offers malicious agents the comfort of knowing they can execute crypto attacks without suffering the same fate as a bank hacker. And often, the payouts are just as profitable. 

Misinformation is another problem in crypto, perhaps the most significant one for stakeholders. Media outlets prefer sensationalized stories as opposed to grounded investigative reporting. Albeit this problem has improved in recent years, the lack of reliable information persists. 

Separating the wheat from the chaff is a notch harder in the crypto space relative to traditional financial markets. Incoming data providers are dealing with this problem, providing unique insights for blockchain information. Still, there are not enough services available to accurately tackle such a large task.

Crypto’s saving grace in this regard is the use of open blockchains, making it nearly impossible to obfuscate information. 

The Path to an Emerging Market

Already the United States Congress is considering passing legislation for cryptocurrency, the United Kingdom’s FCA has drawn out guidelines for cryptoassets, and many other countries are working to provide clarity for the industry.

As proper regulation comes to cryptocurrency, risk-averse players will likely move into the crypto space too. The influx of capital will continue to raise the broader crypto market and could mark the leap from a frontier to an emerging market.

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