Key Challenges Remain Including Cyber Security, Regulatory Compliance, Fork Management and Accounting
The future success of cryptoassets will depend on the ability to institutionalize them by building trust and facilitating scale, with participation from both traditional and emerging players within the global financial services ecosystem, says a new report: Institutionalization of Cryptoassets from KPMG, with contributions from Coinbase and other industry companies.
“While Bitcoin is still dwarfed by traditional asset markets, crypto is now much broader than just Bitcoin, and the debate on the case for crypto is far from settled,” said report co-author Kiran Nagaraj, managing director of KPMG’s cryptoasset services. “Crypto has many use cases but, in order to succeed, institutionalization is a necessary next step to help drive growth for the tokenized economy.”
The report points out that recently there has been a wave of new entrants in the market, such as established financial services institutions, security token platforms and crypto exchanges, who are launching various crypto products and services for the emerging blockchain-based tokenized economy. It suggests the tokenized economy will likely be one of the more significant innovations enabled by crypto.
Constance Hunter, KPMG’s chief economist and report co-author said “Cryptocurrency is a remarkable and innovative leap forward, but the leap is not yet far enough to meet all the criteria for a true currency,” Hunter said. “There are still big hurdles to be crossed before they can attain mainstream global acceptance.”
Authors of the paper also suggest that crypto represents an opportunity to potentially transform the financial services sector and create a truly open global financial system.
“Crypto has the potential to revolutionize the financial services industry and create a truly open global financial system,” said Jeff Horowitz, Chief Compliance Officer at Coinbase. “The institutionalization of crypto will bring new capital into the space and drive a range of innovation that will ultimately benefit all participants. It will drive greater economic choices, innovation, efficiency and opportunity, all of which have the potential to impact billions of people around the world.”
The report takes an in-depth look at some of the key challenges facing crypto including:
Compliance with regulatory obligations:
The explosion of consumer interest in cryptoassets, in addition to increased participation of traditional financial institutions, has U.S. federal and state regulators keenly focused on regulatory obligations of crypto businesses.
Know your customer (KYC) and asset provenance:
Verifying the identity of customers and sufficiently understanding the provenance of crypto assets to determine customer risk profile
Cryptoassets are prime targets for cyber criminals, and provide a very attractive attack surface for hackers. While specific crypto security practices are confidential and vary greatly, some leading industry approaches are emerging.
Accounting and financial reporting:
Cryptoassets challenge traditional financial reporting boundaries.
In addition to potentially sizable tax liabilities incurred on the sale or exchange of crypto, taxpayers may also bear significant tax accounting burdens in respect to their holding.
Fork management and governance:
Forks represent a unique aspect of cryptoassets, which occur when a single blockchain breaks into two separate chains.
“These are all critical challenges and only time will tell if institutionalization will become reality and drive the future growth of crypto,” said Nagaraj.
The report says of the 2,000 plus cryptoassets issued or mined, many, including those with high valuations, don’t have a functional product associated with them.
Is crypto a solution looking for a problem?
“No, there are real problems that cryptoassets are looking to address and their staying power will be defined by their ability to reduce friction and inefficiencies that currently exist within the global economy,” Nagaraj said.
KPMG LLP is the independent U.S. member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s independent member firms have 197,000 professionals working in 154 countries. Learn more at www.kpmg.com/us.