In addition to liquidity, institutional involvement in the crypto industry brings several valuable contributions. One of the key benefits is the regulatory certainty it ushers in, particularly regarding taxation and compliance. With institutional players entering the space, regulators are forced to address important questions related to tax obligations and disclosure requirements for businesses engaged in crypto trading.
Determining taxable events in the crypto industry can vary depending on the jurisdiction. In the United States, traders are required to calculate profit and loss on every trade, perps position, and on-chain event. However, other countries take a less stringent approach, and some even choose not to tax crypto at all. Understanding tax obligations in the crypto space can be challenging for individual traders, but it becomes even more complex for businesses whose financial statements are subject to scrutiny and whose listing of Bitcoin on their balance sheet may require permission.
However, as institutional involvement grows, the industry is seeing progress in terms of regulatory clarity. Institutions bring with them a retinue of lawyers and lobbyists who can negotiate with regulators and push for more explicit regulations. When major players like BlackRock express their interest in a Bitcoin ETF, even the Securities and Exchange Commission (SEC) must pay attention. Recently, Grayscale’s favorable court ruling against the SEC has demonstrated the ability of institutions to influence regulatory decisions. This precedent will likely increase the confidence of institutions in their ability to shape legislation in their favor.
For individuals and firms already involved in the crypto space, greater institutional participation is seen as a positive development. When large, established institutions enter the market, it puts pressure on regulators to provide clear guidelines and rules. While not every provision pushed through by regulators may benefit the industry, collectively they offer something that has been lacking for years: clarity. Institutions need concrete regulations to operate within, and their involvement can help establish clearer answers to questions surrounding crypto classification. This clarity will benefit the entire industry by making digital assets less exotic and more legitimate in the eyes of regulators.
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Furthermore, institutional involvement in the crypto industry helps combat negative perceptions and accusations of money laundering and wash trading. As more traditional financial institutions enter the space, it becomes harder for crypto opponents to vilify the industry. The participation of reputable institutions not only brings legitimacy to digital assets but also helps dispel misconceptions and fosters greater trust among regulators and the general public.
There are already signs of institutional adoption in the crypto industry. Governments and businesses around the world are exploring blockchain-based initiatives and digital currencies. Major banks are introducing crypto custody and trading services for their clients. In August 2023, Europe’s first spot Bitcoin ETF listed in Amsterdam, marking a significant milestone for institutional participation in the industry.
While regulators and institutional players are still catching up in terms of expertise compared to early adopters and industry pioneers, an open and collaborative dialogue between regulators, institutions, and early adopters is crucial. Each group brings unique insights and perspectives, and cooperation among them is likely to lead to positive outcomes for the industry as a whole.
In conclusion, beyond providing liquidity, institutions bring valuable regulatory certainty to the crypto industry. Their involvement forces regulators to address important questions related to taxation and compliance. Through their lobbying efforts and negotiation power, institutions can shape legislation in their favor and pave the way for clearer regulations. Institutional participation also helps legitimize digital assets and dispel misconceptions about the industry. Overall, the increasing involvement of institutions is a net positive for the crypto industry, as it leads to better rules and better outcomes for all participants.
