Regulation and Institutionalization Outlook in 2022

Written by EmergentX Insights team

February 19, 2022 | 1 Min

  • Regulators and centralized institutions worldwide are catching up, given the rapid
    evolution of the digital asset sector. Specific areas ripe for regulations include
    stablecoins, centralized exchanges and security tokens.
  • Regulatory clarity and institutional-grade infrastructure are the strategic elements that
    pave the way for institutional digital asset adoption, which will shape the operating and
    product environment.
  • Long term relative risk-reward of digital assets will gradually trend down as the market
    environment matures.

Core thesis

The institutionalization of digital assets is a long-term secular trend, driven by the virtuous
cycle of network effects. ‘Legitimized’ by regulations and institutional demand, it has become
more acceptable to treat digital assets as an asset class. Regulatory clarity and institutional-
grade infrastructure are the strategic elements that pave the way for institutional digital asset

Significance and Disruptive Impacts

Global digital asset regulations will pick up in 2022, with the entry of the traditional financial
institutions and competitive pressures worldwide. This, in turn, will increase
the urgency for institutional-grade infrastructure and solutions.

In addition, jurisdictional differences and the fragmented global regulatory landscape for
digital assets inevitably give rise to regulatory arbitrage opportunities.

Expectation for 2022

  • Regulation begets legitimacy
    The digital asset space will face a tighter regulatory environment in 2022. A
    consistent regulatory framework will pave the way for mass adoption. Specific areas
    ripe for regulations include stablecoins, centralized exchanges and security tokens.
  • Institutional and government access reshape operating and product environment
    If 2021 was the year that governments and institutions strategized their entry into
    digital assets, 2022 is when they will take decisive action. We expect more countries
    to integrate digital assets into their financial systems (at varying degrees), which will
    reshape the product and operating environment.
  • Risk-adjusted returns to remain elevated in 2022 and slowly come down.
    Long term relative risk-reward will gradually trend down as mainstream institutions
    continue to enter and the market environment matures. Arbitrage opportunities will
    gradually disappear, and trading strategies will need to evolve.
  • Elevated institutional M&A interest
    Financial and non-financial institutions play catch-up with the rapid developments in
    the digital asset space through M&A.
  • CBDC development will enhance digital asset regulations
    Governments worldwide will be incentivized to implement the CBDC for its
    advantages as a tool to implement monetary and fiscal policy.
  • Improved and streamlined infrastructure
    Security, compliance and liquidity will drive ecosystem maturity and mainstream
    adoption. Examples include KYC, institutional-grade applications and infrastructure,
    digital asset-related insurance and payments that create better bridges between fiat
    and crypto.

    Trust and transparency drive mass adoption. Longer-term, a clear separation
    between digital asset exchange, clearer and custodian will gradually occur with the
    entry of large institutional players.

  • Firms respond to regulatory and enforcement actions
    Firms will continuously reassess where they stand, and some may gravitate to
    friendlier jurisdictions as global regulators lay down digital asset regulations or
    take enforcement actions.
  • More “nuanced” valuation approaches to digital assets
    2022 will see investors attempting to build relative abstractions of digital assets
    into their valuation methodologies.

EmergentX Digital Asset 2022 Outlook

Year of Consilience

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