How to Build an Asset Class in Three Easy Steps

Andy:
Kelly,
the
US
election
has
concluded
and
Trump
is
headed
back
to
the
White
House,
bolstered
by
a
GOP-lead
Senate.
Bitcoin
has
already
posted
a
new
all-time
high,
but
we
know
there
is
no
magic
wand
to
transform
crypto
into
a
fully-functioning
asset
class.
How
will
we
get
there?

Kelly:
Let’s
think
about
three
parts:
1)
regulatory
infrastructure
that
allows
projects
to
exist
and
to
raise
capital;
2)
investment
infrastructure
that
connects
investors
to
the
capital
markets;
and
3)
an
investment
framework
for
allocators,
big
and
small.

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Andy:
Nicely
framed.
That’s
a
lot!
Let’s
hit
topic
1
today:
regulatory
infrastructure.
If
crypto
is
meant
to
be
decentralized,
why
is
the
U.S.
so
important?

Kelly:
Though
crypto
is
inherently
decentralized,
with
users
and
investors
worldwide,
the
U.S.
remains
crucial
due
to
its
concentration
of
capital
and
favorable
business
environment.
Globally,
investors
recognize
the
U.S.
as
a
hub
for
technology
and
innovation.
A
supportive
administration
can
further
enhance
this
landscape,
benefiting
the
industry.
In
the
long
term,
as
blockchain
fosters
decentralized
trust
and
governance,
societies
may
organize
less
by
nation
and
more
by
shared
interests,
transcending
traditional
boundaries.

Kelly:
A
primary
barrier
is
the
lack
of
regulatory
clarity
regarding
whether
digital
assets
qualify
as
securities
or
commodities.
Currently,
only
bitcoin
has
a
clear
classification,
while
other
tokens
risk
being
labeled
as
unregistered
securities.
The
SEC’s
“regulation
by
enforcement”
approach
is
unsustainable
and
may
deter
innovation
within
the
U.S.
This
also
has
downstream
implications
for
capital
markets,
as
crypto-focused
exchanges
and
custodians
face
the
risk
of
offering
unregistered
securities
under
SEC
guidance.

Andy:
Indeed.
As
you
have
heard
me
rant
about
more
than
once,
the
regulatory
“jump
ball”
between
the
CFTC
and
SEC
is
an
impediment
and
a
nuisance.
This
was
true
with
basket
swaps
when
Dodd
Frank
went
into
effect
12
years
ago
and
it’s
true
now
with
crypto.
I
think
about
how
the
SFC
in
Hong
Kong
was
out
ahead
creating
regulatory
structure
around
“virtual
assets,”
acknowledging
their
special
properties
and
users.
Now
VARA
in
Dubai
and,
of
course,
MiCA
in
Europe
are
following
suit
in
their
own
way.
Much
of
this
regulatory
architecture
is
designed
around

existing
assets
and
exchanges.
You
bring
up
an
important
point:

new
blockchain-based
projects
also
deserve
a
clear
path
for
financing
and
launch.

Kelly:
How
would
you
expect
indices
to
be
treated
in
a
best-case
scenario?

Andy:
If
the
ultimate
regulatory
goal
is
investor
protection,
indices
offer
not
only
diversification
of
returns,
but
also
of
risk.
If
one
index
constituent
fails,
the
index
will
replace
it
and
survive.
Not
to
say
this
removes
risk,
but
non-systemic
failures
are
not
catastrophic.
We
think
this
provides
a
handy
solution
to
regulators
for
index
derivatives
and
index-based
U.S.
ETFs:
if
an
index
is
demonstrably
broad-based,
it
may
not
be
necessary
to
make
specific
regulatory
determinations
about
each
and
every
constituent.
If
regulators
insist
on
asset-by-asset
regulation,
users
become
concentrated
into
a
small
number
of
assets,
even
if
those
tend
to
be
the
largest,
like
bitcoin
and
ether.

So,
we
know
what’s
on
our
wish
lists,
but
I
guess
we
should
end
on
an
upbeat
note.
We
are
impatient,
perhaps
even
frustrated,
but
also
hopeful
that
the
new
administration
can
implement
more
crypto
friendly
policies,
right,
Kelly?

Kelly:
Timing
is
critical,
as
other
countries
are
competing
to
create
a
more
favorable
environment
for
blockchain
technology
builders.
We
are
seeing
significant
developments
with
bitcoin,
ETH
ETFs,
and
the
CoinDesk
20
index,
which
offers
investors
broad-based
exposure
to
the
crypto
market.
However,
to
fully
capture
the
growth
potential
of
blockchain
technology
and
its
applications,
active
management
expertise
is
essential
to
navigate
this
emerging
and
complex
space.
As
liquid
venture
investors,
we
strive
to
select
high-potential
projects
with
attractive
valuations
while
closely
monitoring
regulatory
and
infrastructure
developments
to
mitigate
any
non-investment-related
risks
that
could
impact
our
investment
outcomes.

Andy:
A
path,
even
an
arduous
one,
will
be
most
welcome,
and
I
think
it
will
happen.
And
it
looks
like
you
have
teed
up
the
active
vs
passive
debate!
I
look
forward
to
it.

Note:
The
views
expressed
in
this
column
are
those
of
the
author
and
do
not
necessarily
reflect
those
of
CoinDesk,
Inc.
or
its
owners
and
affiliates.