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Crypto assets: Moving into the spotlight

MANNIK S. DHILLON, CFA, CAIA 20-Aug-2021

Spotlight

While Congress was hotly debating the need for more fiscal stimulus and new mega-infrastructure legislation, it quietly brought crypto assets into the spotlight. Whereas some investors might worry about this increasing scrutiny, we think it’s a net positive. Regulation leads to institutionalization, and for an emerging asset class to be debated at the highest legislative level only adds to our steadfast view that it indeed is an asset class that deserves a place in a broadly diversified investment portfolio. 


So how, exactly, are crypto assets linked to infrastructure legislation? In the most recent version of the $1.2 trillion infrastructure bill, there were provisions on crypto tax reporting inserted into the legislation to help pay for it. Some industry pundits argued that language and reporting requirements were not fully thought through and virtually impossible to comply with. In addition, the bill used a very broad definition of what constitutes a crypto “broker,” and the worry is that it might also cover miners, node operators, and other members of the crypto ecosystem. This matters because if this language isn’t tightened up and clearly defined, these important blockchain participants may be forced to move offshore and, in turn, reduce the country’s competitive advantage in this emerging asset class.  However, while that might be a negative for the U.S., there’s no doubt that crypto assets and networks would continue to exist and potentially flourish—a nod to their decentralized nature and lack of central bank control that is a hallmark of the asset class.


Ultimately, Senators failed to reach an agreement and passed the infrastructure bill as is, without addressing this language. The headlines focused on this “failure” by crypto lobbyists. Indeed, at first blush this might be viewed as bad news for the crypto market, and investors were bracing for an immediate reprisal in the pricing of major crypto assets. Yet that negative price action never really materialized. When this news broke, prices for the largest crypto assets fell briefly, only to normalize quickly and even resume their recent upward near-term trend.


So what’s the key takeaway from all this? First, we do believe it’s likely that the vague broker definition and other language will be addressed in the future. It was reported widely in the press that dissent on the revised crypto language was opposed by a single Senator who withheld his vote as bargaining chip for another political agenda, thus blocking the unanimous support required for approval. Therefore, this amendment did not fail on its merits, and it’s rather encouraging that the proposed new language had broad, bi-partisan support. 


More importantly, however, are the lasting and more positive implications. In our opinion, the pricing action after this political wrangling and the very fact crypto is being debated in the Halls of Congress point to the continuing maturation of the asset class. And as the regulatory structure matures, it will no doubt bring new participants—including institutional investors—who are interested in capturing the potential upside offered by crypto assets.