While it's clear that investments in cryptocurrencies have exploded — to a market cap of $269 billion from $97 billion in early July 2017, according to CoinMarketCap.com — it's less clear how they should be regulated and what's in store for institutional investors.
According to the 2018 Cryptocurrency Survey released by law firm Foley & Lardner LLP, a majority of respondents want greater regulatory certainty for the world of cryptocurrencies and initial coin offerings, which give investors the opportunity to exchange conventional currency or cryptocurrency in return for a digital asset labeled as a coin or token. The June survey, which garnered responses from more than 60 financial professionals, showed 84% wanted ICOs to be regulated by the federal government, states or both. Moreover, 68% wanted regulation for ongoing purchases and sales of cryptocurrencies, and 55% said it's needed when it comes to paying for goods and services.
Cryptocurrencies now are regulated by multiple agencies in the U.S., especially on the federal level, said Patrick Daugherty, partner and member of Foley & Lardner's blockchain task force. "Every thoughtful investor is consulting with lawyers who specialize in working with the complex cross-section of SEC, CFTC and Treasury FinCEN laws — no one should try this at home," he said. "You can be 100% certain that a particular crypto offering is unlawful, but the reverse is not true. It's virtually impossible to get to 100% confidence that a crypto project is lawful absent expert analysis or government endorsement, which is exceedingly rare."
Jeffrey P. Mahoney, general counsel for the Council of Institutional Investors, wrote Securities and Exchange Commission Chairman Jay Clayton in May to voice support for meaningful oversight when it comes to cryptocurrencies and ICOs.
"We remain cautiously optimistic that some cryptocurrencies and ICOs might flourish and facilitate capital formation that benefits all long-term investors and the economy generally," Mr. Mahoney wrote. "However, we strongly believe that the potential long-term success of cryptocurrencies and ICOs is dependent on those products, and those who participate in the markets for those products, operating within the purview of the federal securities laws."
The Commodity Futures Trading Commission has designated bitcoin as a commodity, which means that fraud and manipulation involving bitcoin traded in interstate commerce are within its purview, as is the regulation of commodity futures tied directly to bitcoin.
CME Group Inc. and Cboe Exchange Inc. each launched a bitcoin futures contract last year after receiving approval from the CFTC. As of mid-July, Cboe has had an average daily volume of 5,710 contracts since its launch, while CME has had average daily volume of 2,826 contracts in 2018.
Matt McFarland, senior director of Cboe Futures Exchange business operations and strategy at Cboe Global Markets, said trading from institutional investors has been light, but they are closely monitoring the space. "A more conservative type of investor really wants to let the product mature and make sure that the infrastructure that we have put in place is working properly," he added.