Since being thrust into the public eye roughly six years ago, digital assets and their owners have struggled with being viewed, by some, as illegitimate — or at the very least, risky. From digital native techies wearing hoodies and coding in entirely new languages to the asset class as a whole being absent any meaningful laws or regulations, it’s not a surprise there was initial reluctance and skepticism surrounding the industry. Essentially, digital assets had been relegated to those who seek risk and the die-hard believers, with any moderate approach being few and far between.
However, in the wake of seismic events — from the collapse of stable coins to entire exchanges — the industry re-evaluated its position and the standards to which it holds constituents. The digital asset industry is indeed beginning to sing a different tune, and it is clear that a framework for appropriately investing in digital assets is becoming a tangible reality. Three major trends evidence the digital asset world is becoming more institutionalized, less focused on immediate and outsized returns, and devoted to making the asset class a must have in any well-balanced investment portfolio.
1. Active Participation in Regulation
The industry now calls on regulators to help them establish best practices. This is in contrast to the earlier approach, which was to leave the space as unregulated as possible to promote natural innovation.
Recently, the SEC has brought actions against several digital asset exchanges. In response, these exchanges have feverishly stated they want to work with the SEC to legislate, not litigate. Cohen & Company frequently participates in open letters to comment on IRS policies and procedures pertaining to the industry. We do this because helping establish a reasonable path to compliance will only benefit our clients and the industry at large. Ultimately, blockchain, the backbone of digital assets, is a transparent system — so the industry is looking to align with an idea central to its technology.
2. Long Term Focus
The projects currently receiving the most funding in the space are those with long term horizons. Fund managers are looking to invest in projects that aim to better the digital asset industry with incredibly technical projects and applications. The appetite for trading liquid tokens, while still present, is beginning to shift toward a more stable investment profile. This is indicative of an industry that is beginning to mature and understand that disproportionate risk is not a prerequisite for making investments. Additionally, the industry is developing ways to evaluate and rank investments as some of the traditional finance “Trad-Fi” methods that exist do not appropriately account for the economics of a decentralized financial instrument. This will allow decision makers to make proper and informed choices over time.
3. International Adoption
The digital asset class by design has no borders. An increasing number of countries are beginning to accept digital assets as an asset class that’s here to stay, and are working with the industry to understand its nuances and potential to add value. While some of the banks in the U.S. have taken a hard stance against digital assets, there are foreign financial institutions providing the industry with the support it needs. Of course, it is important that U.S. adoption continues to increase as well, so the industry is importing some of the best practices it learns abroad to U.S. operations. When an industry is multinational, it inherently commands a certain level of institutional support. Members of the industry need to commit time and capital to appropriately abide by rules in a continually increasing number of jurisdictions.
Although less concreate than the trends above, it is clear from our vantage point that the industry is moving away from its casual, hoodie-wearing roots. Proponents of digital assets are taking a more structured approach to moving forward — embracing regulation, having collaborative discussions, and, yes, even wearing suits. And the industry couldn’t have matured its philosophy at a better time! Digital assets are poised to achieve significant synergies with evolving fields such as artificial intelligence and quantum computing. The future of digital assets not only continues to be a promising avenue for innovation, but should be brighter than ever before.
Contact Michael Binck at mbinck@cohencpa.com or a member of your service team to discuss this topic further.
