The audit firm from the “Big Four” KPMG believes that to unlock the full potential of cryptocurrency assets , their institutionalization is imperative.
She wrote about this in her new 42-page report on crypto-assets, where she also considered the key barriers to their spreading as a global financial services ecosystem and suggested ways to overcome them. The report was prepared with the support of Coinbase, Fundstrat Global Advisors and Morgan Creek Digital. His review leads The Block .
KPMG recognizes that “it is no longer possible to ignore crypto assets”, and notes that in 2017 they began to compete with traditional asset classes in terms of investments. Their position became stronger in 2018, when new financial mechanisms entered the cryptocurrency space: platforms of security tokens, steylcoin , etc.
KPMG analysts also point out that widely recognized financial institutions launch their own cryptocurrency products and services. At the same time, the new industry is still far behind the traditional asset markets, whose global capitalization exceeds $ 300 trillion.
Place of cryptocurrency and their institutionalization
KPMG recognizes that in the global ecosystem of financial services there are real problems that cryptocurrency can solve, but at the same time notes that at present there is a significant gap between their use and existing developments.
According to the company, today there are more than 2,000 cryptocurrency assets, however, many of them are not associated with any functioning product.
The report also provides several possible scenarios for the use of cryptocurrencies :
- Bitcoin as a digital storage tool;
- Ethereum as a tool for raising funds;
- Litecoin as a quick and cheap means of calculation;
- Tokenization of traditional assets.
"ICO is a significant invention that provides new methods for more efficient capital raising with the participation of much broader groups of investors," the company admits.
The report also repeatedly contains the idea that the main role of cryptocurrency is in their ability to reduce the manifestations of the inefficiency of the world economy. Accordingly, KPMG sees great potential in asset tokenization.
One of the limiting factors for the spread of cryptocurrency is their volatility, KPMG believes, while noting that its importance will gradually decrease as the industry improves. As a possible solution to the problem, KPMG names steyblcoins.
Creating an open financial system
In this section, Coinbase talks about the potential of cryptocurrencies in context:
- Services for persons without access to banking services;
- Hedging against the depreciation of national currencies in unstable economies;
- More efficient payments;
- The creation of a global financial system that is not controlled by any state or company;
- Simplify access to financial services.
Coinbase believes that the formation of cryptocurrency will take place in three stages:
- Investment / speculation;
- Institutionalization;
- Practical use.
Coinbase argues that unlike most of the other classes of assets cryptocurrency started their way not to institutionalization, and on the retail trade . The company notes that institutional investors have a different set of requirements than retail ones, and pay particular attention to legal compliance, transparency and governance.
Key problems of cryptocurrency institutionalization
- Compliance with regulatory requirements : A cryptocurrency business must clearly define what it proposes in order to designate its place in the regulatory system.
- Management of forks : Institutions may form specialized councils to determine their position on a particular fork.
- Identification of clients and the origin of cryptocurrency assets : Fiat channels must comply with current requirements in the banking industry, such as countering money laundering, customer identification, transaction monitoring, etc.
- Secure storage : Cryptocurrency transactions are irreversible, so institutions should pay particular attention to safekeeping their digital assets. There is an urgent need for qualified repositories that would allow safe storage of cryptocurrencies in accordance with the requirements of regulators.
- Reporting : Neither the United States Financial Accounting Standards Board (FASB) nor the International Accounting Standards Board (IASB) provided recommendations for reporting when working with cryptocurrency assets, which caused a number of difficulties for financial institutions.
- Taxation : Financial institutions require clear guidance for tax cryptocurrency. The only US Tax Administration (IRS) guide on this topic is dated April 2014, according to which cryptocurrencies are treated as property. Each episode of spending or exchange of cryptocurrency is a taxable event.
KPMG standards for cryptocurrency
KPMG claims that as cryptocurrency spreads, institutions should prepare for future changes. KPMG has developed standards that provide answers to the above and other questions and are already being used by several companies in the cryptocurrency sector. Standards are designed to help companies scale.
Cryptoeconomics
In order for a cryptocurrency asset to meet KPMG standards, it must fulfill three basic functions of money, that is, be a unit of account, a means of accumulation and exchange.
- A unit of account – many consider cryptocurrency a unit of account;
- A means of accumulation – cryptocurrency should be much more stable;
- Means of exchange – cryptocurrencies should be accepted in a fairly broad jurisdiction.
According to the report, in order for cryptocurrencies to be used in a wider economy, it is necessary to solve a “chicken or egg” problem.
“In order for cryptocurrencies to be a means of exchange, they must be a means of accumulation. In order for cryptocurrencies to be a means of accumulation, it is necessary to eradicate their speculative nature. However, many creators of cryptocurrency are quite satisfied with the rapid growth of their tokens. As long as at least one cryptocurrency will not meet all three criteria, they cannot be considered fully currencies. ”
Cryptocurrency developers should consider three main factors depending on the level of practical use they want to achieve:
- Opportunity to purchase – some cryptocurrencies can only be earned, some – to earn and buy;
- Transferability — It is sometimes advisable to limit the ability to transfer an asset outside a closed system
- The repayment option – not all cryptocurrencies can be exchanged for fiat currencies.
If all three possibilities are realized, then such a cryptocurrency, according to the KPMG classification, will be completely ready for use.
In conclusion, analysts note that cryptocurrency assets can increase the level of trust in the financial system due to its immutability, which is a basic characteristic of the blockchain technology . However, in the light of current restrictions, this may not be enough to gain trust without the necessary institutionalization.
Thus, while the cryptocurrency ecosystem is being improved, financial institutions continue to experiment with the assets represented in it.
