While some institutional investors are interested in digital assets, the majority are still holding off due to a lack of regulatory clarity and ongoing turmoil in the space, industry experts said.
"Institutions need legal certainty; they need very clear and precise rules and an understanding of the law," said David Adams, Washington-based counsel at Goodwin Procter LLP. "And until they can get that in the United States, I think it's going to be very difficult for them to get comfortable with crypto."
In Washington, cryptocurrency has been a major focus for both Congress and federal agencies in recent weeks. On June 5-6, the SEC filed enforcement actions against major crypto exchanges Binance and Coinbase, feeding into what some Republican lawmakers and industry players have called a "regulation by enforcement" approach.
Just a few days prior, House Agriculture Committee Chairman Glenn "GT" Thompson, R-Pa., and House Financial Services Committee Chairman Patrick McHenry, R-N.C., released a 162-page discussion draft on digital asset regulation, which, along with a host of other provisions, gives more authority to the Commodity Futures Trading Commission to regulate the digital commodity market.
On June 6, CFTC Chairman Rostin Behnam told lawmakers the agency needs that authority to fill a gap in digital asset regulation, though it cannot do so without legislation and proper funding.
Historically, the SEC and the CFTC have disagreed on what constitutes a digital commodity vs. a digital security, which Mr. Behnam said is simply a difference of opinions that's "fine" and "healthy."
However, Mr. Adams said, "It's not great for institutional investors because they don't like this chaos that they're seeing in the current space."
In general, sources agreed that institutional investors are hesitant to enter the digital asset space because of the uncertainty that still plagues the industry.
"Institutional investors, obviously, cannot put money into an industry where there's no clarity as to whether an asset is a security vs. a commodity because there's a lot of consequences with respect to whether these assets can be traded in compliance with the law," said Dario de Martino, New York-based partner at Allen & Overy LLP and co-head of its blockchain and fintech practice.
"We have noticed quite a decline in client interest in cryptocurrencies over the past year or so," said Alison Adams, Portland, Ore.-based managing principal and research consultant at Meketa Investment Group, in an email.
In 2021 and early 2022, there was some client interest in the asset class, Ms. Adams said, though Meketa did not recommend investing in cryptocurrencies.
"In our cryptocurrency discussions with clients, we emphasized the evolving regulatory environment and potential risks to investors where regulatory oversight was unclear," Ms. Adams added in the email. "In retrospect, our caution on the possible risks associated with cryptocurrencies and regulatory change appears sound."