Crypto Crypto Education Cryptocurrencies

Five Things Standing in the Way of Crypto Asset Institutionalization

Cryptocurrencies are getting adopted worldwide. They are becoming irresistible as world citizens realize the security and transparency of blockchain fintech. And the global markets are warming up to the thought of crypto-asset institutionalization.

Cryptocurrencies were once the subject of institutionalized bullying, with most nations and states outrightly banning financial blockchain technologies. It’s taken a long walk for cryptos to enjoy the financial freedom they do today.

The revolution is still a long way from crystalizing. Nonetheless, crypto-asset institutionalization can consolidate the major blockchain wins. Institutionalization will result in rampant, positive growth in cryptos, giving these assets access to big-time investors.

Most entrepreneurs steer clear of blockchain fintech because of previous regulatory constraints, but institutionalization will reinforce investors’ confidence and eliminate information asymmetries. Ultimately, blockchain fintech will serve widespread applications. Still, cryptos must overcome the following five things that are standing in the way of crypto-asset institutionalization.

Regulatory Squabbles

Twenty-First Century economies are mostly centralized, whether capitalist or socialist. Governments and central banks run all financial book-keeping, which gives them all the power and access to data.

Cryptos are decentralizing central-bank functions to community census, and that’s why governments initially opposed blockchain fintech. These innovations are challenging to new audiences, and ignorance prompts fears among players favoring the status quo. (Source)

This inventive fintech faces regulatory gaps, and innovators are crossing moral lines due to a lack of adequate regulation. Moreover, uncertainty over raising crypto capital is hindering institutionalization as consensus hasn’t been achieved.

Assets must disclose all sorts of details before institutionalization, and blockchain applications peg their success on privacy and security. That explains the raging debate over the disclosures crypto startups should make to investors.

However, blockchain is becoming increasingly familiar to financial executives and prominent politicians as its applications grow beyond underground markets. A global standard for crypto disclosures is taking precise form, and uncertainty is increasingly diminishing.

Start-ups issuing crypto tokens are embracing increased disclosures as investors soften towards cryptocurrencies and other blockchain applications. The standardization of disclosures will open up these assets to a consensus over regulations.

According to the Financial Crimes Enforcement Network, crypto exchanges are subject to money service business regulations under:

  • Customer identification.
  • Transaction monitoring.
  • Money laundering.
  • Financial services requirements.

Regulations determine that crypto transactions should track and identify the counterparties of fraudulent transactions via private keys in the hash encryptions.

It’s A Novel, Noble Idea

Crypto assets are new concepts that are plagued with misconceptions. Markets are always resistant to novel ideas, no matter how noble, and cryptos aren’t familiar applications to regular folks. Moreover, rural folks and majorities in developing countries have limited digital infrastructure, which hinders crypto applicability.

Crypto ideals are based on impeccable security and outstanding transparency, but blockchain technologies are still novel. Transaction speeds are considerably slow, and scale prospects are low. Just like electric cars need massive charging infrastructure to tip the balance of favor, the crypto ecosystem needs revamping to be globally viable for institutionalization. It will take more miners to put in the proof of work, and knowledge dissemination takes time to build up impeccable skills.

Blockchain firms are enjoying increasing access to fundings. It’s all thanks to specialists accumulating the knowledge needed to improve on cryptos and edging closer to the intended ideals of digital currencies.

Security Concerns

Crypto-assets are high-value and entirely digital, and these currencies are widely targeted by online criminals with manipulation and hacking skills. Owners of crypto assets must exercise cybersecurity protocols.

Malware and other data phishing software trip the internet, and cyberattacks expose valuable data owned by financial services. The cryptographic coding of these assets makes them secure, but they are not impenetrable enough for the kind of value they store.

The transparency of crypto assets is its biggest pro, but still an undoing. Blockchain technologies store data in publicly accessible, immutable ledgers, and third-party monitors with top-notch analytical capacities can prey on the wide-scale financial data.

Blockchain fintech firms have to build protocols and capacities within cryptography that allow monitoring and preemptive identification of threats. Institutionalization is elusive until cryptos can protect investors’ assets.

Ignorance and Negative Public Perception

(Source) Unfortunately, the masses are crypto-ignorant, and they think Bitcoin is the name of all cryptocurrencies. Bitcoin came into conception and application under a shroud of mystery and institutionalized bullying. It also came under various, coordinated cyber-attacks, and word about the affronts became a public spectacle.

Therefore, the widespread, public crypto-ignorance perceives all crypto assets as insecure, despite the high-level security offered by cryptography. Moreover, the initial legal resistance to Bitcoin reflected negatively on the image of these assets.

Cryptocurrencies were initially used by criminals and underground businesses interested in its clandestine nature of transactions. The need for decentralization was appreciated more by those who had skeletons in their closets, and it led to the degrading public perception about the morality of cryptos.

The shroud of mystery and ignorance is lifting as the utility of blockchain fintech becomes familiar among local folks. Blogs and academies are demystifying the myths around these technologies, and the decentralized transfer of value is becoming more attractive.

Minimal Financial Services Support

You can easily find brokerages, exchanges, and SaaS fintech when investing in stocks and other options. However, Wall Street still hasn’t dedicated considerable expertise to crypto assets.

Financial products need infrastructure around them for support, and crypto-assets are missing out on analytical services, insurance, and research. Without portfolio management, investors must sort out their crypto assets on their own. Major players are reluctant because of uncertainty about tax laws for blockchain transactions.

Crypto startups need to roll out massive support infrastructure for the ease of use during investment. They need to dedicate technologies and personnel to offer crypto brokerages and exchanges.

Negotiations with tax authorities are resolving the uncertainty around blockchain transactions, which could encourage major financial institutions to roll out dedicated services and products for crypto assets.

Final Word

Blockchain fintech is still novel, and cryptocurrencies require lots of innovation and development. The technology is young, and the revolution is underway. Crypto fintech is maturing faster than the human populations that are supposed to adopt it, and people just need time to embrace the gains of cryptocurrencies.

Mass education in the blockchain niche is paramount for crypto-asset institutionalization. It enables positive user and investor perspectives, helping overcome the above-listed challenges to crypto asset institutionalization.

Blockchain and DLT

What Are The 5 Key Challenges Facing Blockchain Today?

Blockchain is one of the most disruptive technologies of the last decade, from powering cryptocurrencies to dizzying heights of success to industry after industry racing to incorporate it into their processes.

It would be ideal if blockchain was a problem-free technology providing problem-free solutions. But this is not the case.

These are the core five issues that are the bane of blockchain’s current existence: unsatisfactory privacy and security; and regulatory, legal, and ethical issues.

1. Security Issues

One of the defining features of public blockchains is their decentralization. This means that they are not controlled, nor can they be shut down by anyone. Decentralization helps keep the blockchain secure since thousands of computers from the globe are participating in maintaining and securing the network. Even if someone managed to shut down some of the computers, the rest would carry on operating the network.

Bitcoin decentralization_Forex Academy

But it is still this decentralization that’s potentially an Achilles heel for the blockchain. While it’s safer than a centralized network, which has a single point of control – and hence a single point of attack, the decentralized model is not perfectly secure. A public blockchain is vulnerable to a 51% attack.

A 51% attack describes an occasion when an entity or a group of people manages to take control of over 50% of a blockchain’s computing power. This would allow them to tilt the blockchain’s operations in their favor. For instance, they could double-spend coins, block transactions, or stop miners.

Smaller blockchains, in particular, are more susceptible to attacks. This is because they have fewer miners securing the blockchain, making it easier for an entity to take control of a bigger percentage of the network’s computing power. For instance, for the IOTA blockchain, a bad actor would only need to take control of 34% of the total network’s hash power.

Luckily, such an attack is extremely rare and unlikely. It is prohibitively expensive for someone to attempt to take control of over 51% of a blockchain network. The sheer financial and time resources needed to pull it off are enough to make one perish the thought.

2. Privacy Issues 

Transparency is another defining feature of public blockchains. The history of transactions is available for everyone to see. While your personal credentials are not made public (or even required for you to conduct a transaction), your public address can be used to link back to you. This state is known as pseudonymity.

In an era of ubiquitous internet when privacy is highly valued, pseudonymous transactions do not exactly fly with many users. To address this problem, several privacy-oriented blockchains have sprung up to fill the gap. Examples include Monero, ZCash, Komodo, and DASH.

3. Legal Issues

While blockchain technology has increased in popularity and is being embraced across industries, its legal standing is still very much grey. Some of the legal issues are as follows:

  • Decentralized Autonomous Organizations (DAOs): these are organizations that are much like traditional organizations in terms of function, except they are governed by computer code, and commands are executed by computers without the intervention of humans or central authorities. But let’s say, for example, in the event of a conflict, how will it be resolved? Who bears responsibility?
  • Smart contracts: Blockchain-based smart contracts are a new kind of contract that is self-verifying and self-executing. This removes the need for costly intermediaries and saves time. Given that smart contracts are pure lines of code, it’s debatable whether they can really be considered as complete contracts, at least in the traditional sense. It’s all well and good if all parties meet their end of the bargain. But in the event of a dispute, would a smart contract be legitimate in the eyes of the law? At the very least, ensure that you have a conflict resolution procedure encoded in the smart contract.
  • Leaving a blockchain: Let’s imagine you’ve been using a blockchain to record sensitive data such as your company’s financial records or employee data. What happens if you stop using the service, and you do not possess copies of the ledger? Before you sign up for a blockchain service, ensure there are provisions in place to ensure that a blockchain service provider surrenders your records back to you at the end of the contract.

4. Regulatory issues

Cryptocurrencies were the first application of blockchain. They are defined by features such as decentralization, distributed, and immutability. This decentralized feature does not particularly fly with the majority of governments and regulators all over the world. This creates a state of regulatory uncertainty.

Bitcoin Regulation | Forex Academy

Governments have taken different approaches to this. Some governments such as Bolivia, Colombia, Iran, Algeria, Pakistan, Bangladesh, and Ecuador have entirely banned cryptocurrencies. Other countries, such as the United States, the UK, Canada, Slovenia, and South Africa, have accepted them. Acceptance can mean anything from cryptocurrencies being accepted as means of payment but not as legal tender, to them actually being used as legal tender – like is the case in the Marshall Islands.

Too strict regulation can stifle innovation. On the other hand, a total lack of regulation could create undesirable circumstances such as market manipulation and unlawful use.

5. Ethical Issues 

Blockchain gives rise to some ethical issues, with the most problematic ones being 1) its environmental impact and 2) criminals taking advantage of it.

Blockchain networks utilize cryptography to maintain security and process transactions. The amount of power that goes into this is jaw-droppingly enormous.

Check out the statistics:

  • If bitcoin was a country, it would be the 41st highest electricity-consuming country in the world.
  • Every year bitcoin produces 34.76 megatonnes of carbon dioxide, similar to that of Denmark.
  • Just one bitcoin transaction consumes more energy than 100, 000 Visa transactions, and as much as a US household consumes in 22 days.
  • The estimated global mining costs for Bitcoin is $1.5 billion.
  • Bitcoin mining uses more power than 12 states (Alaska, Hawaii, Idaho, Maine, Montana, New Hampshire, New Mexico, North Dakota, Rhode Island, South Dakota, Vermont, and Wyoming).

In an era when environmental concerns are more relevant than ever, the staggering use of energy is alarming. For this reason, crypto developers need to come up with more environmentally friendly ways of releasing new coins and processing transactions.

Then there is the issue of blockchain enabling criminal activities such as drug peddling, child trafficking, sex trafficking, tax evasion, money laundering, and so on. Cybercriminals take advantage of the pseudonymous and anonymous nature of cryptocurrencies to engage in such activities. Even cyber attackers want to be paid in cryptocurrency and not other types of money.

Final Words

Blockchain is a powerful technology that has revolutionized certain facets of our society. However, at this stage, the world has to contend with its less-than-perfect implications. While some of the issues require a shift in attitude, others are inherently blockchain’s own. Whether any of these is set to change in the future is anyone’s guess.