New report offers no-nonsense take on potential and perils within growing digital asset space
The CFA Institute has released a comprehensive report on the development of cryptoassets within the context of investment management. Cryptoassets: Beyond the Hype offers a no-frills take on digital finance from the point of view of investment practitioners as well as research-based recommendations for investors, fiduciaries, and policymakers.
In the report, the CFA Institute emphasized the need for a strong and clearly defined regulatory framework to protect investors. Without one, the CFA Institute asserted that crypto would lack the crucial element of public confidence and ultimately fail to gain mainstream acceptance.
Through interviews with various investment professionals and crypto experts, the CFA Institute identified three principal obstacles to the progress of cryptoassets in the investment market: valuation, fiduciary duty, and the custody of assets.
"A strong regulatory framework needs to be established for the benefit of both crypto providers and users,” CFA Institute head, EMEA advocacy, Olivier Fines said. “Policymakers must either agree on the application of existing laws to various components in the crypto ecosystem or craft new laws to fill in any gaps. Trust in the integrity of crypto markets is essential to attract investors and build crypto networks to scale.”
Fines noted that crypto platforms merged functions that were normally kept separate in finance for a reason. Brokerages, exchanges, custodians, clearing agencies, and market makers were some examples of separate, mainstream finance players whose roles were blurred if not effaced in the crypto world.
"Existing regulations that intend to prevent traditional finance firms from using customers' assets to fund their own or affiliated businesses may not always provide similar protections for investors in crypto,” Fines added. “The debacle at FTX shows the harm that can come to investors and platform participants when client assets are not kept safe. The example of FTX further underlines the importance of custody issues and the responsibility of investors to base their decisions on the investment case and not on hype and speculation."
Among other suggestions, the report recommended that institutional investors and fiduciaries:
- Avoid using hype as “substitute for due diligence and prudent analysis”;
- Continue to apply basic portfolio construction principles by balancing short-, medium-, and long-term objectives; and
- Give a grounded analysis of the intrinsic value, volatility, and correlation effects of any proposed investment within the overall portfolio; and
- Conduct a careful analysis of the sustainability of the business model and acquisition strategy underlying a cryptoasset.
The report also called on policymakers to work on harmonizing regulatory frameworks at an international scale; establish whether cryptoassets should be classed as commodities, currencies, or other forms of financial instruments; maintain a tech-neutral regulatory framework for digital assets; and monitor the cryptoasset market while controlling risks for market abuse.
“To puncture the hype, investors must think through what is actual, what is potential, and what is merely aspirational,” Deane said. “They should also distinguish between the underlying distributed ledger technology – which could well prove disruptive – and the business prospects for the thousands of individual cryptoassets on the market today and more to come.”
