Published on
Ed Fluss

Crypto & Rollercoasters: Understanding the Dynamics of a Wild Ride

When you get on a roller coaster, you know the ride will be wild but there’s a lot you don’t know. And maybe if it’s just one ride, you don’t want to know. Such as, what is this roller coaster made of, how often is it inspected for safety and maintenance, who performs those inspections, etc. You get the idea. It’s not usually until something goes wrong that these other questions come into focus.  

The same can be said of where we are today in crypto investment. With a steady stream of headlines focused on crypto investors losing assets for a variety of reasons, it’s not surprising big money is hanging back to see how various aspects of this emerging marketplace shake out. That’s what makes this moment different from earlier crypto winters, so to speak. As with big business inflection points, three changes often result: consolidation, new investments and better educated customers.

We’re already seeing this trend, in part driven by FTX and its founder Sam Bankman-Fried. As noted in this CNBC article, FTX has extended a $250 million revolving credit deal with BlockFi to a total of $400 million. FTX’s deal with BlockFi includes the opportunity to buy the crypto trading platform at a maximum price of $240 million. Bankman-Fried’s Alameda Research has also lent $500 million to crypto brokerage Voyager Digital, which is now reorganizing through Chapter 11. Additionally, FTX recently announced its acquisition of Embed Clearing, which provides white-label brokerage services. Sam Bankman-Fried reported he and his company still have a “few billion” to dedicate to consolidation efforts for struggling digital asset firms. 

At the same time, new money continues to flow into the emerging crypto marketplace, with Reciprocal Ventures announcing recently they closed a $70 million fund to invest in web3 through both traditional equities and digital tokens. CEO of MicroStrategy, Michael Saylor, is also taking advantage of this crypto downturn. MicroStrategy revealed they have purchased 480 Bitcoins in the time period from early May to late June and have implied that they have no intention of slowing down. 

Those institutional investors who already own bitcoin and other cryptocurrencies are better educated today thanks to the lessons of the last few months. And even big firms, such as Fidelity Investments, are not backing away from the market. Last month, Fidelity CEO Abby Johnson said of crypto that when others are leaving, “that’s the time to double down and go extra hard into it.” 

There’s no doubt cryptocurrencies and digital assets are here to stay. Yet, we are only just beginning to build the trusted infrastructure and oversight that will provide investors confidence their investments will be safe, sound, and accessible. 

With Congress introducing legislation and officials at the Federal Reserve, U.S. Treasury, and Securities & Exchange Commission all focused on the urgent need for transparency and controls in this emerging market, it appears some form of federal oversight is coming. In a speech this month, Lael Brainard, the Vice Chair of the Federal Reserve System, said “the cross-sectoral and cross-border scope of crypto platforms, exchanges, and activities, it is important that regulators work together domestically and internationally to maintain a stable financial system and address regulatory evasion.”   

Crypto may have been a rollercoaster ride of late, but better market structure and regulatory oversight for digital asset markets are in progress. While state-by-state regulation may function for roller coasters, the crypto market will benefit from federal regulation that provides clarity and ensures consistency across all 50 states, increasing confidence for institutional investors. 

At Protego Trust Bank, we’ve proactively sought federal regulation as we develop a national trust bank purpose-built for digital asset services and tailored to the needs of institutional clients. By seeking approval from the Office of the Comptroller of the Currency, we should be well positioned for clients in the U.S. as well as overseas given the OCC’s involvement in international groups making important interconnected, global decisions about related policies. 

By embracing federal regulation, we aim to help set the standard in the digital asset market so clients don’t have to blindly hop on a ride.  

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