Obi Nwosu, CEO Coinfloor
The future of cryptocurrencies brings with it exciting possibilities. The innovation is set to broaden the offering of financial services around the world, and tackle everything from financial exclusion to streamlining the delivery of public services. One day, cryptocurrencies will become an integral part of the future financial system and change how we interact with finances forever.
While media headlines tell stories of the rise and fall of Bitcoin, analysts, retail investors and market observers are taking stock of the potential implications of the varying fortune of cryptocurrencies. Society has grown far more aware of them, and this curiosity – both of its potential as a currency and as a store of value – is driving increasing amounts of interest.
However, a mainstream consumer focus is misdirected when it comes to bringing the vision of cryptocurrencies to life. A stable, sustainable long-term future for the innovation will not come down to adoption amongst retail investors, but instead by encouraging the participation of institutional investors.
Setting the stage
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Cryptocurrencies are decentralised by nature, which means there is no central authority to put measures in place to govern its price or manage volatility. Institutional investment money flows and volumes will bring necessary stability to cryptocurrencies to make them a viable currency and asset for consumers.
Appetite for cryptocurrencies exists amongst institutional investors and traders; it has been a challenging environment post-financial crisis, and difficult to achieve returns on deposits and short term investments. This has made cryptocurrencies an attractive option for investors, who are seeking alternative investment vehicles to diversify their portfolios. But the volatility of cryptocurrencies and lack of a clear regulatory framework is making it difficult for this group to feel confident that they can capitalise on this asset. For institutions, unpredictable market dynamics create unacceptable levels of risk.
Physically delivered Futures contracts
Appropriate infrastructure also has a vital role to play in making cryptocurrencies an available and attractive investment option for large-scale investors. In recognition of this, Coinfloor recently launched CoinfloorEX – the first physically delivered Bitcoin Futures Exchange. Introducing a commonly understood market-based valuation approach allows institutional investors to confidently hedge their risk against a volatile asset class, allowing them the ability to lock in prices with confidence.
We are proud to be the first cryptocurrency exchange offering physically delivered Bitcoin Futures contracts. Other Futures contracts for cryptocurrency have been available for some time, but they provide cash settlement on the expiry date, which does not meet market requirements for physical delivery of the underlying asset. Physical delivery prevents price slippage on trades at the time of settlement, as well as any risk of manipulation, in comparison to settlement based on an index price created by using other exchanges.
Institutionally focused security
Of course, compliance and security concerns are a major concern for institutional investors. When it comes to exploring a new asset class, confidence is key.
We are the only exchange in the market to provide 100% multi-signature cold storage of Bitcoin, and to safeguard client portfolios from theft, loss or other security issues associated with partially online or online only storage. This was technically and operationally difficult for us to implement, but a strategic decision that we have remained committed to delivering since inception.
We also choose to provide our users with monthly cryptographic solvency audits of Bitcoin balances, setting the industry standard amongst cryptocurrency exchanges for transparency and regular auditing, as well as reassuring investors that Coinfloor has sufficient liquidity to manage market fluctuations.
Alongside this, our client on-boarding process is modelled strictly against industry standards for AML and KYC, with minimum default questions that are much more rigorous than the majority of exchanges.
A clear regulatory framework will play a major role in driving institutional investor confidence and involvement in cryptocurrencies. Policymakers are learning in real-time and are working hard to get their arms around this new technology, and its market implications. In a constantly changing landscape, they are collaborating with companies in the space to shape appropriate and balanced regulation that will promote the long-term sustainability of cryptocurrencies. Our business is taking an active role in propelling dialogue between industry, policymakers and regulators, and we believe that regulation will be implemented over the coming years.
Regulation is sometimes criticised as a hindrance to innovation. However, in this instance, the lack of regulation could be responsible for stifling consumer trust. Having rules in place would create more market certainty and ensure that unscrupulous players adhere to common standards which will ultimately boost consumer confidence. The current lack of consumer protection is additionally seen as a concern to institutional investors, serving as yet another issue halting their involvement with cryptocurrencies.
Leading the way
As the longest established group of cryptocurrency exchanges for institutional or sophisticated investors and traders, we are proud to lead the way in both technological advances and regulatory conservation. Our experts span across a range of fields – including technologists, financiers and cryptocurrency professionals – meaning we can track, spot and respond to, and lead, market trends as cryptocurrencies evolve and move into the next phase of their inevitable evolution.
Our goal is to create a safe and transparent environment for institutions to trade and invest in cryptocurrencies, leaning heavily on our values of trust, reliability and security. To do this, we are working to build a connection between emerging cryptocurrency markets and the traditional finance industry. With institutional investors becoming increasingly involved in the area, we will soon see strides towards the sustainability and stability of cryptocurrency, fulfilling its potential as an alternative asset class and monetary system.