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On the heels of several cryptocurrency regulatory events, one analyst described 2018 as a "developmental year" for the nascent technology.
While the Securities and Exchange Commission continues to deny cryptocurrency-based exchange-traded funds, despite growing institutional interest in the industry, cryptocurrency firms have now banded together to regulate themselves. At its origin, bitcoin and the underlying technology was exploited by criminals, and regulators continue to grapple with how to protect investors. This year has been the "reality check" on a still largely unknown and developing technology, MoffettNathanson analyst Lisa Ellis said in an interview.
Although some in the industry have criticized strict regulation of cryptocurrencies around the world, Ellis said the SEC is not treating cryptocurrency differently than it has any other commodity.
"You would think they would be at most somewhat dismissive. At worst, it wouldn't be surprising if they were actually specifically trying to block crypto," she said. "In contrast to that, you've seen remarkable governmental support globally."
Several cryptocurrency companies have come together to establish an industry-sponsored self-regulatory organization, or SRO, called the Virtual Commodity Association. Cameron and Tyler Winklevoss, the co-founders of cryptocurrency exchange Gemini, initially proposed this organization in March.
The group, which includes Bitstamp Ltd., bitFlyer USA Inc., Bittrex Inc. and Gemini Trust Co. LLC, scheduled its first meeting for September.
In a recent interview with S&P Global Market Intelligence, SEC Commissioner Hester Peirce said an industry policing itself is "a great idea." An SRO creates an industry forum that is "collectively motivated" to fix issues that regulators raise, Ellis said, calling it a "good additional step" on the path to making cryptocurrencies mainstream.
In the same week, the SEC rejected more proposed bitcoin-based ETFs. It turned down applications for nine bitcoin ETFs from ProShares, Direxion and GraniteShares, although those proposals have been stayed and will be reviewed by the commission.
An ETF would open the doors to more institutional investors as well as to the common consumer. But the SEC has twice thwarted the Winklevoss brothers, most recently in July. In its denials, the agency has cited a lack of protective measures in place to fight fraud and manipulation of the underlying assets.
However, regulators continue to ask for more transparency, and institutional investor involvement could shine a light on a somewhat secretive marketplace, Aite Group analyst Gabriel Wang wrote in an email. Information including the trade volume of each cryptocurrency on an exchange and historical pricing records could be made public with these efforts, he added.
Nonetheless, it is a "remarkable" vote of confidence for the cryptocurrency industry that regulators are "so actively engaged," Ellis said. "It's an indicator that the vision for crypto is truly transformational."
In other cryptocurrency news, the Bank of Thailand is developing a digital currency, and it expects to complete the first phase of its proof-of-concept trial in March 2019, CoinDesk reported. A major limiting factor to cryptocurrencies gaining mainstream acceptance is that governments are not comfortable with the digital version of their own fiat currencies, MoffettNathanson's Ellis said. A central bank developing a digital currency is a "very big step," as it is starting to understand and use cryptographic technology.
A cryptocurrency trading firm has rented space in one of the most expensive offices in the world. Founded in 2014 by a former Citigroup Inc. trader, BitMEX has leased the 45th floor of the Cheung Kong Center, the Hong Kong Economic Times reported, citing unnamed sources. The U.S.-based organization joins the likes of Goldman Sachs Group Inc., Barclays PLC and Bank of America Corp. in the Hong Kong skyscraper.
Elsewhere in fintech, Federal Deposit Insurance Corp. Chair Jelena McWilliams said the agency is "open to receiving" industrial loan charter applications.
Several fintech companies, including Square Inc., Social Finance Inc. and Varo Money Inc., have recently applied for an ILC or for a bank charter. Square withdrew is bank application in July to improve some aspects of the filing, and it plans to refile. SoFi pulled its bank application in October 2017 after a major management shake-up, including the departure of its CEO.
"ILCs that have been approved in the past ... looked more like financial services companies than some of the ILCs that may be coming down the pike with the fintech changes," McWilliams told reporters Aug. 23. But the regulator noted that the FDIC would look at each application for its "unique business models and the impact on the industry and the consumers."
On the insurtech front, U.S. insurers do not appear as engaged with blockchain technology as their counterparts overseas, even though companies have a wealth of conceptual applications for blockchain technology. An S&P Global Market Intelligence analysis found that U.S. insurers are likely taking a wait-and-see approach to blockchain, which is now in a make-or-break moment.
From Aug. 17 to Aug. 24, the SNL U.S. Financial Technology Index rose 2.36%.
A recent report from S&P Global Market Intelligence explores how banks and insurers are embracing fintech innovation. The report looks at recent trends and provides outlooks for the insurtech, digital lending, digital investment management, digital banking, payments and distributed ledger technology sectors. Click here to read the report.