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Digital assets to benefit once regulatory environment becomes clearer, says Sygnum Chairman

Date
14/08/2023
Written by
Lykke
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Following a month of turbulence in the global banking sectors, investors rightly wonder whether their assets are safe in hands of traditional banks. Digital assets such as cryptocurrencies have emerged as winners from this loss of trust. “Digital assets will get stronger because of this paradoxical situation,” says Luka Müller, chairman of the Swiss digital asset bank Sygnum.

A bank crisis shook the financial markets last month, causing bank clients to withdraw their assets. When the speed of withdrawals is greater than the speed at which the targeted banks can consolidate their balance sheets, we face de facto bank runs.

The liquidation of Silvergate Bank (SI.N), followed by the failure of Silicon Valley Bank (SIVB) and that of Signature Bank (SNBY) took the markets by surprise. All three banks had close links to the cryptoverse, as they financed numerous crypto start-ups and venture-backed start-ups. A week later, Credit Suisse, Switzerland’s second-largest bank collapsed and was taken over by UBS, the country’s largest bank.

“We experienced a situation in the traditional banking market which could not happen in a proper digital asset custody set up. A bank run is not possible as regards digital asset banks, as most of their assets are digital and therefore off-balance sheet and available,” explains Müller. Digital assets benefited during the turbulence in the banking sector with the market capitalization of the global cryptocurrency market up 25 percent over a ten-day period. “In the public,  the focus is on crypto exchanges, crypto regulations and so on and not on the underlying technology behind these digital assets (blockchain), which works perfectly well. The discussions should be more focused on functionality, property protection and efficiency gains,” he adds.

Müller gives Ethereum’s Shapella upgrade as an example. The crypto rewards reaped by Ethereum’s validators for holding the digital asset passively, a mechanism called staking, were locked. On April 12, the world’s second-largest cryptocurrency upgraded its mainnet ­– the decentralized blockchain on which it operates – and enabled a withdrawal functionality. “These are very positive signals. I hope we’ll go back to the technological discussions,” Müller says.

Regulatory clarification urgently needed in the US

Regulatory uncertainties in the cryptoverse, particularly in the US, does however dictate the generally negative public sentiment toward digital assets. “It’s high time that we obtain more legal clarity, in the largest crypto asset market,” Müller underlines.

Investors currently expect a ruling on whether the crypto currency XRP falls under the jurisdiction of the US Securities and Exchange Commission (SEC) and regarded as a security, or under that of the Commodity Futures Trading Commissions (CFTC) and qualify as a commodity. “The pending ruling will only affect XRP but might give some indication in general. But it’s too early to say whether the ruling will be interpreted as a general rule,” says Müller, adding “it’s a question of time before the question will be clarified, but it could in the worst case take years.”

The ruling may have a wide-ranging impact on the entire US crypto sector, as commodities are taxed more favorably and regulated less stringently than securities. It’s more expensive to ensure that securities comply with all regulations in place.

Sygnum does not take on US clients nor retail clients. “We’ve nevertheless seen a massive increase in prospective clients, a bank run in the opposite direction of a traditional bank run over the past couple of months Many dossiers are currently undergoing due diligence. It takes time to proceed all the applications,” Müller says.

Tougher regulations also loom in the rest of the world

Tightened anti-money laundering (AML) rules, including digital assets, are in the pipeline across the globe. In the European Union, the European Parliament will vote on the matter later this month. In India, the country’s AML laws were tightened to also include digital assets in March.

“The crypto industry has no interest in avoiding the application of (new, stricter) rules. We embrace clear rules. Unclear rules slow the development of the crypto space,” he concludes.

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