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Investing.com – The CFA Institute, the global association for investment professionals, presents an objective review of the development of digital finance. The report makes recommendations for institutional investors and regulators. For the CFA Institute, cryptoassets need a stable and organized regulatory framework to protect investors. Without it, cryptocurrencies will not be able to gain mainstream acceptance.
The report, titled Cryptoassets: Beyond Fashion: An investment management perspective on the development of digital finance, features key findings from interviews with investment professionals and cryptoa experts from around the world. It addresses three key emerging issues that the market will need to clarify before these assets can move forward: valuation, fiduciary duty and custody.
Through an objective analysis of the attractiveness and risks that the cryptocurrency market presents for a typical investor, the study highlights the dangers of a system in which traditional intermediaries would no longer be responsible for guaranteeing and securing the transactions, facilitate price formation or raise capital. It also presents recommendations for investors, trustees and regulators.
José Luis de Mora, CFA, President of CFA Society Spain: “A stable regulatory framework must be established in the interest of providers and users of cryptocurrencies. Regulators should either agree to apply existing laws to parties of the crypto ecosystem, or draft new laws to fill any gaps that may exist. Trust in the integrity of cryptocurrency markets, as in any market, is essential to attract investors and strengthen their development.”
Olivier Fines, CFA, Head of Regulatory Affairs for EMEA at the CFA Institute: “Crypto platforms combine functions that in conventional finance are kept separate, such as the roles of intermediaries, exchanges, custodians and credit agencies. Existing regulations, designed to prevent traditional financiers from using client assets to fund their own companies or affiliates, do not always offer similar protection to cryptocurrency investors. the harm that investors and platform participants can suffer when their assets are not protected The example of FTX highlights the importance of custody issues and the responsibility of investors to base their decisions on rigorous investment analysis, and not on fads and speculations.”
Eight recommendations for regulators:
- Wherever possible, legislators should harmonize regulatory frameworks internationally. Agree on definitions and monitoring programs that take into account the specific nature of cryptocurrency services.
- Determine whether crypto-assets are securities, other forms of financial instruments, commodities or currencies, and harmonize this definition internationally. The CFA Institute is of the view that several crypto-assets would meet the definition of securities under US securities laws, for example, while in the European Union this debate is being conducted under MiFID II. The CFA Institute opposes the design of new expansive regulations as a simplistic response to the difficulty of qualifying crypto-assets.
- Regulation of crypto-assets and digital finance must remain technologically neutral. Regulators should not judge which technological developments or directions offer the greatest benefits to markets, investors and consumers. Nor should legislators compromise investor and consumer protection because a technology is new.
- Regulate stablecoins due to potential systemic risk. Stablecoins, a subset of cryptoassets, need to be properly regulated from a prudential, business conduct, and investor protection perspective. The method used to maintain the link should be reviewed and its warranty should be independently verified. These instruments create links and ramifications with the traditional financial markets, so that they can represent a systemic risk for financial stability if they are not properly controlled.
- Oversee the crypto-asset market to ensure competitiveness and prevent malfeasance. Tracking programs should be put in place with a focus on costs, fees and business performance. The potential for consolidation should not lead to a new value chain operating in the interest of a selection of technologically advanced companies.
- Monitor and control the risks of market abuse. Regulators must keep advanced forms of data science in check to monitor this activity and ensure market integrity. The fragmented nature of the crypto-asset market will require regulators to define information-sharing mechanisms to ensure a consistent and comprehensive understanding of crypto-asset transactions.
- Monitor and measure the accumulation of financial risks in the DEFI sector. Depending on the pace of development of decentralized financial services (DEFI), regulators should develop metrics to measure and quantify the accumulation of risks. Borrowing and lending in the DEFI sector may require similar prudential measures as those associated with financial institutions for their commercial securities lending operations.
- Custody of crypto-assets must be regulated and secure. Legislators should place a high priority on enacting a framework of laws and regulations to ensure safe custody of customers’ crypto-assets. Cryptocurrency platforms and businesses should not be allowed to use client assets to fund their own activities. Client assets should be segregated and protected even if the platform or company goes bankrupt.
Six recommendations for trustees and institutional investors:
- Infatuation and/or speculation do not constitute a solid basis for an investment file. Proper analysis of value, merits and risks remains necessary for fiduciaries to fulfill their duties of prudence, loyalty and care.
- Continue to apply the basic principles of portfolio construction. In line with the lessons of the CFA® program, investors are recommended to continue to take a holistic and strategic view of building their portfolio by balancing short, medium and long-term goals.
- Careful analysis of portfolio value and performance is required. Trustees are recommended to make an informed analysis of the intrinsic value, volatility, correlation effects, momentum or technical characteristics of the investment they are proposing in the overall context of the portfolio, whether directly in the form of tokens or indirectly through a company’s equity, before claiming that this investment meets their usual standard of supervision.
- Intrinsic value should be tied to a complete understanding of use cases. Fiduciaries interested in the fundamental value of crypto-assets are recommended to conduct a thorough and rational analysis of the use cases of the token, project or company.
- Careful analysis of the sustainability of the business model and customer acquisition strategy is required. Fiduciaries are recommended to pay particular attention to the potentially circular nature of the analyzed cryptocurrency project, focusing on the intrinsic and distinctive qualities of the project, as well as its customer acquisition model.
- Trustees must determine the chain of custody and security of client assets. As such, they must demand the same level of quality or care that they apply to all other assets, or contract with a third party capable of providing that level of quality.
Stephen Deane, CFA, Senior Director of Financial Markets Policy at CFA Institute: “Cryptocurrency advocates often tout the bright future that awaits cryptocurrencies and their disruptive technology. , they must proceed with caution. There is no substitute for due diligence and careful analysis if investing is to be distinguished from mere speculation. To stop speculation, investors must think about what is real, what is which is potential and which is only an aspiration.They must also distinguish between the underlying distributed ledger technology, which could well prove disruptive, and the business prospects of the thousands of individual cryptocurrencies. in the market today and more to come. At CFA Institute, we firmly believe that there should be no shortcuts to professional and well-rounded investments. n facts.”