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October 19, 2020

Episode 025

Cointelegraph & Anderson Kill


Cointelegraph this week will publish its latest research report about institutional demand for digital assets. Demelza Hays, head of research at Cointelegraph and one of the authors of the report, joined Teana Baker-Taylor for a sneak preview of the report. Among the findings was that 39% of European institutional investors said they plan to invest in digital assets in the future. Meanwhile, Stephen Palley, a partner at law firm Anderson Kill, broke down the civil and criminal charges against cryptocurrency derivatives exchange BitMEX, sharing his expert opinion on what is in store for the senior executive team and what the future might hold for the company.

Market Spotlight: Discovering Institutional Demand for Digital Assets 

Cointelegraph will publish its latest report, dubbed “Discovering Institutional Demand for Digital Assets,” on Oct. 22. Demelza Hays, head of research at Cointelegraph and co-author of the report, joined Teana Baker-Taylor to discuss some of the findings. 

Hays explained how the focus of the research report was on investors across Europe who participated in a survey between June and September 2020. The median AUM of the survey participants was $500 million, and the total assets managed by the 55 asset allocators was more than $719 billion, which is double the current market cap of the broader cryptocurrency market. The survey participants oversee roughly $6 billion in crypto assets, which represents 2% of the entire crypto market. The geographical focus was in Switzerland, Germany, Liechtenstein and Austria, where there has been a lot of innovation in this field. She also described current demand, saying, 

(17:12) “We had 36% saying that they had already invested in digital assets. So this means they either already owned them in the past or they currently own them. And the majority of them came in during 2019. So that was basically when most of them joined. A few of them came in during 2018. And also a good portion came in during 2020. So we had pretty much the last three years is where a lot of the respondents had entered into the market. And we also asked them, ‘Do you plan to invest in the future?’ for the respondents who said they have not currently invested. And 39% said they planned to invest in the future. So actually more of the respondents said we plan to invest in the future than said they’re already invested.” 

Cointelegraph also asked the survey participants what they are investing in, such as structured products or funds, and whether they were investing directly and doing custody on their own. Hays explained, 

(19:07) “Basically what we found was that the majority of people wanted to invest directly. And then the second most interesting was with regulated funds, specifically alternative investment funds. Then it was the UCITs funds; these are structures of funds within Europe. And then at the end it was structured products, which basically certificates, ETPs, ETNs. And then futures. So I have to say that overall, the majority of them wanted to interact with the spot market instead of the futures market.” 

Teana also asked about the barriers to entry for institutional investors, in response to which Hays said, 

(19:55) “We had an interesting perplexing result there. One tactic with surveys is you ask people the same question but in two different ways, just to see if the answer stays the same. We asked them, ‘What is your main obstacle?’ And a lot of them said regulation. But then later on in the survey we asked them, ‘Is it more internal policies within your company that’s restricting you from investing or allocating some of your company’s portfolio to digital assets, or is it regulation within your country that’s stopping your firm?’ And they said that the majority of the problem was policies within their own company that was stopping them from allocating resources and not government regulations. So I think either regulations from inside the firm or from the government is what is the biggest barrier.” 

Governance and Guardrails: BitMEX vs. the CFTC 

The U.S. Department of Justice filed an indictment against the BitMEX senior executive team, including Arthur Hayes, Samuel Reed and Benjamin Delo as well as Gregory Dwyer, for violating the federal Bank Secrecy Act. At the same time, the Commodity Futures Trade Commission (CFTC) took civil  enforcement action against BitMEX for not doing enough to prevent U.S. customers from onboarding onto the exchange. 

Stephen Palley, a partner at law firm Anderson Kill, explained exactly what the BitMEX management team is up against, saying, 

(38:10) “I mean it’s as serious as a heart attack. The allegations are of significant and ongoing violations of the Bank Secrecy Act, a statute that has criminal penalties of up to five years imprisonment for each violation. I don’t see any appearance by Mr. Hayes or Mr. Delo or Mr. Dwyer. In the criminal case, it would appear that they are still at large.” 

Palley offered his opinion about what it all means, saying, 

(40:43) “My expectation is based on drawing from other examples and particularly given the fact that this has been going on according to the indictment since 2014. And from at least 2017 or 2018 BitMEX knew that they were dealing with US persons and that they were required to comply with the BSA and they didn’t. They moved to the Seychelles for the state of reasons that it would be easier to bribe people there. My expectation is that, my back of the envelope guess, is that eventually the executive team will be found, will be extradited to the United States and will do prison time. There’s been a significant flight of capital from BitMEX. I think they’re down 30%. Certainly, no interest in causing panic and I don’t have crypto holdings. So this doesn’t affect me personally. I would be surprised if that exchange exists in a year or two.

Palley had a warning for other offshore cryptocurrency exchanges, saying, 

(50:10) “I guess I would say it’s a good time to get your house in order if you’re offshore and maybe you’ve had contact with the United States in the past and not for malevolent reasons, just because maybe you were sloppy. It’s a good time to evaluate that and come up with a compliance plan, whether it’s backwards looking or forwards looking. In some cases, it’s better to go to the regulator before they come to you. I don’t know how BitMEX handled that, but apparently how they handled it was not the right way. Otherwise there wouldn’t be criminal charges.”

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Gerelyn Terzo
Gerelyn caught wind of bitcoin in mid-2017 and after learning about the peer-to-peer nature of Satoshi's creation has never looked back. Previously she covered institutional investing and fintech for several major trade publications. Gerelyn resides in Verona, N.J.

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