Blog: FTX blow up prompting Congressional calls for regulatory framework – The Armchair Trader

In the wake of the FTX blow up, the fund management industry is considering what its approach should be. Larger asset managers like big hedge funds still like the look of crypto, according to conversations The Armchair Trader has been privy to. This is not the case for smaller, boutique fund managers however.

While some investors like specialist funds of funds estimate there are still somewhere in the region of 2000 dedicated cryptocurrency funds out there, smaller fund managers don’t like the risk profile of crypto right now. A recent survey by the Independent Investment Management Initiative found that 80% of so-called boutique asset managers have no plans to trade cryptocurrencies, although this is in direct contrast to bigger players like BlackRock and Charles Schwab, not to mention Fidelity with its dedicated digital assets division.

Many portfolio managers told the IIMI researchers that their big issue was the absence of fundamentals, especially around pricing and valuation. They also consider crypto markets to be largely speculative. Excessive volatility, the delight of seasoned crypto traders, also frightens them.

Ultimately smaller fund managers who do not already have a dedicated cryptocurrency strategy are unlikely to be considering diversification into the market without specialist knowledge.

As predicted last year by The Armchair Trader, the FTX blow up is pushing forwards discussions by financial regulators as to how they limit damage to investors in the market in the future. This seems like it will be a prerequisite for larger investors. US lawmakers are already calling for Congress to create a legislative framework for crypto. Democrats are blaming the crypto community for what went wrong, while Republicans generally blame Congress and regulators for the FTX debacle.

“Our primary takeaway is that the initial Capitol Hill reactions are conducive to finding bipartisan compromise in the next Congress on crypto regulation,” said prime broker Cowen in a note to fund managers this week. “Our expectation remains that the SEC will emerge as a key regulator of trading platforms and tokens. We also expect custody will be separated from trading platforms to better protect customer assets. We continue to believe the SEC will start moving in this direction with Congress following with legislation.”

Will the US really regulate cryptocurrency markets?

A comprehensive regulatory regime could in fact be just over the horizon, possibly as early as next year. We flagged up in Q4 last year that this was a major prospect for the future of crypto markets. Some key areas crypto investors need to pay attention to include:

  • Lawmakers in the US – and elsewhere – really don’t understand the market; expect them to be led by the regulators
  • A potential US regulatory framework could encompass a ‘split responsibility’ regime between SEC and CFTC
  • Senate Banking Chair Sherrod Brown is a crypto sceptic and has not done much on the banking front either (in two years!) but has said that he sees a need for Congressional action
  • Even pending bills may be revised as the dust settles on FTX

“Ironically, it could well be that the legacy of Sam Bankman-Fried’s career in digital assets is the acceleration of regulatory clarity; but not by the means he had imagined, with his hand influencing the pen of regulators and lawmakers,” said Sui Chung, Chief Executive at CF Benchmarks. “In the medium-to-long term, this spur for regulators is likely to mean that regulatory clarity is finally forthcoming for the digital asset space, with institutions finally getting the clarity they seek; thereby removing the single biggest barrier to institutional entry into the asset class, and perhaps the beginning of digital asset exposure genuinely entering the mainstream investment landscape.”

A survey of over 200 professional investors who responded to a survey by Nickel Digital Asset Management in October found that 88% think the pace of regulation in the crypto sector will intensify. Bear in mind this was BEFORE the FTX blow up. That number is likely to be higher now. Investors already felt the market sell off was prompting the need for more regulation. The wide consensus seems to be that the US, UK and European Union will adopt “a constructive stance” on crypto regulation in the next 12 months. Investors are broadly positive about the shift to more regulation.

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