Finance billionaires betting on cryptos to become next Amazon

During a gold rush, invest in shovel makers, goes the adage. That's precisely what hedge funds looking to get in on the excitement around cryptocurrencies are doing with a flurry of investments in platforms created to buy, sell and store virtual currencies.

At the same time, regulators around the world are asking more questions about how much protection any companies handling crypto assets should offer investors. Tighter rules look inevitable if the market for digital currencies is to become anything more than a sideshow in the world of finance.

The need for trustworthy exchanges is clear. So, the mavericks of finance have been tossing a few percentage points of their assets into new things in the hope that one of them becomes cryptoland's equivalent of the next Amazon.com Inc or Alphabet Inc.

Crypto derivatives exchange FTX just raised $900 million from more than 60 investors including Paul Tudor Jones, Alan Howard and Izzy Englander. Howard, along with hedge fund titans Peter Thiel and Louis Bacon, is also invested in Block.One, the blockchain software company behind cryptocurrency exchange Bullish. And Paul Marshall's $55 billion fund Marshall Wace LLP is a backer of Circle, a digital payments firm that's part of the consortium behind the USDC stablecoin.

Interest from mainstream finance continues to grow, although it's far from clear whether fear of missing out is the main motivation rather than any genuine belief in the market's future or efficacy. A survey of 1,100 institutional investors published last week by Fidelity Investments suggested 70 per cent expect to buy or invest in digital assets in the future. Goldman Sachs Group Inc. says almost half of the family offices it deals with want to include digital currencies in their portfolios.

But the dangers and difficulties of committing client cash to the sector remain problematic. The quality of custodial services, which guarantee investors' cash is held securely, was cited as an obstacle by more than three-quarters of investors in a global survey of funds overseeing a combined $275 billion by Nickel Digital Asset Management, a London-based firm that offers four crypto investment products.

UK regulators have already taken action against one of the biggest platforms. The Financial Conduct Authority last month banned Binance Markets Ltd, an affiliate of leading crypto bourse Binance, from offering products or even advertising, prompting several banks to block card payments to the parent company. Binance Chief Executive Officer Zhao Changpeng told Singapore's Straits Times last week that navigating the global regulatory landscape is his firm's biggest challenge.

More developments may come this week. US Senator Elizabeth Warren posed a series of questions to US Securities and Exchange Commission Chair Gary Gensler earlier this month seeking the regulator's view on how crypto exchanges should be overseen. She pointed to the cross-border challenge the industry poses and asked whether international coordination is needed to protect investors, giving him until July 28 to respond. With the leveraged derivatives commonly used in crypto trades restricted to sophisticated investors in the US, the text of her letter makes clear the direction of travel she expects his agency to follow:

"As the cryptocurrency markets continue to grow and expand, the lack of regulation to provide basic investor protections is unsustainable. The SEC regulates national securities exchanges, and cryptocurrency exchanges that operate in a similar manner should be subject to similar regulatory standards."

Expanding the regulatory purview to encompass crypto exchanges could go one of two ways. It could smother the nascent market if the guardians impose rules that are incompatible with the current freewheeling approach and demand more capital than the platforms can afford. Or it could impose just enough order and stability to legitimize the sector, prompting mainstream fund managers to start investing.

The hedge fund titans are clearly anticipating the second outcome, but they can afford to lose the bet. Let's hope the same is true of the Reddit crowd that's still "hodling" onto Bitcoin - keeping it no matter what - even though it's down 50 per cent from its April high.(Bloomberg)