Leading financial services institutions in the US are keenly awaiting the SEC’s decision on their Bitcoin ETF applications, with critical deadlines from January to May 2024. The anticipated approval of these ETFs, already influencing Bitcoin’s price with a 26% surge in the last three months, marks a pivotal moment in market evolution.
Source: Coindesk – Nov 13, 2023
The crypto sector is drawing attention due to factors like the upcoming Bitcoin halving (which is due to fall in April 2024), its status as an uncorrelated asset class, the “digital gold” narrative and prevailing macroeconomic conditions.
Bull runs in crypto markets have historically attracted significant interest from institutional investors and financial service providers that work with Virtual Asset Service Providers (VASPs) to offer trading, custody, and structured products, enabling an expansion beyond bitcoin into areas like tokenization, stablecoins, staking and private equity.
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The entry or re-emergence of institutions in this space highlights the need for robust due diligence. A lack of understanding about the unique risks associated with digital assets and their management became evident following the collapse of FTX and findings from the recent trial.
A comprehensive due diligence framework that captures the unique risks in digital asset space is essential in guiding institutions through this complex landscape. It should include:
Each category in this framework demands thorough exploration to uphold higher standards in managing risks effectively, fostering a more matured and secure crypto industry.
As the crypto market continues to evolve and intersect with traditional financial systems, the importance of these due diligence practices cannot be overstated. They are not just compliance checkboxes but vital tools to safeguard the integrity of the financial market and protect investor interests.
It’s imperative for institutions to move beyond mere participation in the crypto space to becoming informed, responsible actors. This responsible approach is crucial for ensuring that the crypto market’s potential is fully realized, paving the way for its sustainable growth and integration into the broader financial landscape.
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