Insight & Analysis

As regulation steps up, will treasury’s appetite for crypto increase?

Published: Nov 2022

Cryptocurrencies face a tougher regulatory environment, but regulation doesn’t offer a solution to crypto’s volatility. Fiat-backed stablecoins offer more opportunities for treasury, say experts.

2022 has been a volatile year for cryptocurrencies. Bitcoin and Ethereum are down more than 50% from their all-time highs in late 2021 and with the industry in its infancy, there is no sign that the volatility will end anytime soon. Globally governments are now making serious efforts to regulate the industry to protect investors from scams and to create a transparent process that makes it harder for cyber criminals to hide. But even with a tougher regulatory environment on the horizon, cryptocurrencies will probably remain too high risk for treasurers in the short term. While regulation will help with corporate confidence, the key to making cryptocurrencies acceptable to corporates is to make them fiat-backed and to take them out of their niche, into the mainstream.

While there is still a long way to go, 2022 has seen some progress on the regulatory front. US President Joe Biden signed an executive order in March that called on government agencies to study the ‘responsible development’ of digital assets. The European Parliament’s Markets in Crypto Assets Law unveiled late June has become the first comprehensive regulation around crypto assets, while the UK government has announced that it will regulate some cryptocurrencies as part of a wider plan to make the UK a hub for digital payment companies.

But is regulation alone going to be enough to stabilise the market and make cryptocurrencies a viable tool in a treasurer’s armoury? Not according to Frederic Saunier, General Manager of Diapason Treasury. “More regulation is necessary, to put an end to the ‘Wild West’ of crypto markets and combat crime such as money laundering,” he said. “Regulation would certainly increase the confidence of economic players in the crypto market. However, I don’t think it would lead to less volatility. More regulation is not going to create any mechanism of stabilisation.”

On the other hand, he pointed out that it is important to understand the reason for better regulating the market. “It is necessary up to a certain point,” he said. “But it is likely that the purpose of some governments moving towards more regulation is to slow down the growth of cryptocurrencies. The creation of CBDCs (central bank digital currencies) is also a step in this direction, providing an alternative to cryptocurrencies.”

There is an argument that confidence in the sector may be boosted if all exchanges follow set standards and conduct checks on cryptos. Sentiment is a key factor in the pricing of cryptocurrencies so if confidence increases, so could values. But if regulation ends up being too heavy handed and acts as a deterrent, then demand will drop. Regulation is never going to be the answer to volatility, repeats Saunier, because crypto assets are inherently volatile, with no underlying assets or stabilisation mechanisms. The only way to stabilise their values is to peg them to a fiat currency, or a basket of fiat currencies, like stablecoins.

Fiat-backed stablecoins (as opposed to crypto-collateralised or algorithmic stablecoins) are the ones treasurers should watch, according to industry experts. If crypto currency is to find a place with treasurers, it needs to reach critical mass. At the moment, they are very complex, difficult to understand, and almost impossible to price. But if other fiat currency-pegged stablecoins are created, this could enable the value of cross-currency digital exchanges to be leveraged by corporate treasurers.

In an example of heavy-handed regulation limiting growth, stablecoins were nearly banned in the EU. Earlier this year, the MiCA tabled a proposal to introduce restrictions on crypto tokens that would have effectively banned the top three stablecoins in 2024 – the USDT, USDC, and BUSD, which account for almost 75% of crypto trade volumes globally.

While the ban has since been removed, a €200m cap on non-euro-backed stablecoins could be back in the EU’s comprehensive digital asset framework. The cap would limit transactions using ‘stablecoins denominated in other currencies’, to €200m transacted per day. This is a harsh limitation for EU-based crypto-asset service providers, who may decide to leave the EU as a result. To become law, the European Parliament must vote on the rules, something which is expected to happen in December or early 2023.

Despite the controversy, the crashes, and the fast-changing crypto environment, there are signs that institutional ownership is on the rise. Goldman Sachs now offers investment in underlying and derivatives markets for cryptocurrencies, while Genesis, one of the largest cryptocurrency brokerages for institutional investors, said it loaned a record US$50bn of assets in the fourth quarter of 2021 to borrowers including crypto funds and other financial firms. Genesis said loan originations for 2021 totalled US$131bn, nearly seven times higher than 2020. While regulation may not be the answer to volatility, it may be the answer to boosting institutional confidence and creating the critical mass. But it will not be enough on its own to make cryptocurrencies more palatable to treasurers.

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