Navigating Challenges in Integrating Cryptocurrencies with Traditional Finance
Summary:
Despite recent advancements in integrating cryptocurrencies with traditional finance, notably the US approval of the first spot Bitcoin exchange-traded funds, the journey remains riddled with challenges. Regulatory skepticism and different finance philosophies between traditional and decentralized sectors hinder the seamless fusion of the two worlds. Solutions involve providing administrative-level privileges to regulated entities. However, in the face of strong skepticism in large sectors of the finance industry, much work lies ahead to fully blend cryptocurrencies with traditional finance.
Efforts to blend traditional finance with cryptocurrencies have yielded some impressive results, including the authorization of the first Bitcoin (BTC) spot exchange-traded funds (ETFs) in the US on January 10. The green light from the US Securities and Exchange Commission (SEC) anticipates further investment and intensified institutional engagement in cryptos. However, digital currencies have yet to penetrate the banking sector and most financial firms. It's also worth noting the unwillingness of the SEC to permit the ETFs. Various Bitcoin spot ETFs faced numerous SEC rejections, dating back to July 2013. But as financial giants like BlackRock stepped into the fray and legal issues surrounding Bitcoin ETFs were resolved, approval was finally obtained. Despite this, on January 10, SEC Chair Gary Gensler clarified their approval did not signify an endorsement of Bitcoin.
Efforts to harmonize traditional finance with cryptocurrencies still face significant challenges despite noted progress. While traditional financial enterprises are becoming more receptive towards crypto and blockchain, the integration is far from smooth. Bob Ras, co-founder of Coreum, a blockchain project designed to create smart tokens for tokenized securities and real estate, confirms that regulators have been historically cautious about crypto initiatives, especially those attempting to implement conventional industry standards. To overcome legislative complications, Coreum switched its strategy to providing tokenization services exclusively for institutions.
An important factor contributing to the gap between traditional finance and decentralized finance (DeFi) is their varying viewpoints on financial operations. Initially, Sologenic, co-founded by Ras, operated on the XRP Ledger blockchain. But the unique requirements of the platform led to the creation of Coreum, a layer-1 blockchain with smart contract functionality tailored for institutional requirements. A major challenge they encountered was the lack of compliance with banking standards and on-chain Anti-Money Laundering (AML) and Know Your Customer (KYC) controls. Because of these, many traditional institutions refrain from using blockchain technology. Coreum figured out that regulated financial entities require some level of control to adopt technologies and thus they provided administrative-level powers for such entities.
The authorization of a Bitcoin spot ETF indicates the stock market's readiness to welcome cryptos. However, the broader financial sector remains elusive. This sentiment was clearly expressed on February 22, when the European Central Bank published a report discussing the possibility of a Bitcoin ETF in Europe, ironically titled, "ETF approval for Bitcoin – the naked emperor’s new clothes," clearly showing a skeptical stance towards cryptos. Converting traditional finance sector opinions is a daunting task. Despite increased interactions between traditional finance and crypto, there's still a lot to be done.
Published At
2/26/2024 5:01:00 PM
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