NOTE: Ascendant Director of Cyber IT Services E.J. Yerzak recently spoke at the AIM Summit in Abu Dhabi, a conference that targets alternative investment managers. The following is a brief summary of his key comments during his two sessions, “Primer on Crypto Currency, Distributed Ledger Technology and ICO’s,” and “Legal & Regulatory Insights/AML – Blockchain”
When it comes to cryptocurrency, we are in exciting times in that a reckoning is likely to occur soon, leading to a survival of the fittest. In 2017 and 2018, cryptocurrency and blockchain have gone from fad to mainstream, and international regulators have finally taken notice. As the number and type of cryptocurrency and blockchain investment possibilities have exploded, regulators are beginning to take action to sanction those companies engaging in unregistered offerings, and to force others to cease operations. Meanwhile, regulators from the U.S. to South Korea are starting to lay the groundwork for allowing investments in cryptocurrency that still provide them with comfort that investor risk is addressed through a combination of disclosures and controls to safeguard the integrity and security of the securities involved, and that anti-money laundering risk is addressed through “Know Your Customer” (KYC) processes. Other jurisdictions, such as Malta, appear to be positioning themselves as “crypto-friendly” to ride the wave.
Even as interest in alternative investments continues its rapid ascent, I believe a purge will occur and only a few truly viable cryptocurrencies will survive and remain of interest to mainstream investors. However, the underlying blockchain technology will play an enormous role in transforming the investment industry as we know it — everything from where your assets will be held to how they will be valued.
For now, the importance of performing thorough due diligence on the investments you are considering is paramount – weeding out the scams from the legitimate investment platforms, and then identifying those cryptocurrencies that have the most potential to retain and increase their value (which in part will be determined by those who can adapt to play by the rules and the changing regulatory environment).
The alternative investment industry cares where, and in what financial instruments, they will be permitted to invest their money and their firm’s money. Legal and regulatory developments in the Initial Coin Offering (ICO) and blockchain and cryptocurrency space will largely shape which securities remain viable and which will likely fade from existence or be forced to cease operating in, or offering to, certain jurisdictions. I believe the industry also cares about separating hype from reality, and identifying viable, valuable investment opportunities from frauds and scams looking to capitalize on the cryptocurrency buzz.
While most of the buzz in the U.S. has been around retail investors getting into cryptocurrency, the SEC is concerned with making sure investors appreciate the risks of such volatile investments and can withstand a loss, which is why certain conditions such as the accredited investor threshold are in place. The retail interest in, and demand for, cryptocurrency exposure in their portfolios may be driving a renewed look at whether many retail investors should be categorically excluded from this asset class or should be given opportunities similar to their institutional peers. Similarly, institutional investors appear to be considering exposure to this relatively new asset class for fear of missing out. Either way, it seems clear that while cryptocurrencies are here to stay, a reckoning is coming.
Subscribe to CSS Blog
CSS frequently publishes blog posts which are written by our team from their observations in the field, at conferences and through experiences with compliance professionals. These posts are designed to further knowledge and share industry best practices. Topics run the gamut, including Form ADV, cybersecurity, MiFID II, position limit monitoring, technology challenges and more. Complete and submit the brief form below to receive notifications when we publish new content.