Crypto collapse 'necessary evil' on the way to maturity - KPMG Canada
(Kitco News) The crypto crash over the summer was the market correcting itself after a lot of leverage mixed in with bad actors needed to be fleshed out, said KPMG in Canada's director and co-leader of crypto assets and blockchain Kunal Bhasin.
The Terra Luna collapse and the contagion risks that led to the crypto selloff were "the necessary evil for the industry because there were a lot of bad actors," Bhasin told Kitco News on the sidelines of the Blockchain Futurist Conference in Toronto. "When we say the market corrects itself, that's exactly what happened."
But coming out of this, there's going to be a lot more maturity in the space, Bhasin said. "We saw the level of maturity that the space got after the 2018 cycle and the infrastructure that was built to address all of the challenges. The maturity of the crypto custodian infrastructure, crypto wallets, and how we interact with it. We've seen tremendous improvement over the last three years. And that's what I expect coming out of this."
Risk management frameworks are likely to get an update to address the risks that were overlooked before, he added.
KPMG Canada is a professional services firm that added Bitcoin and Ethereum to its corporate treasury at the beginning of the year. And the firm continues to hold that allocation, Bhasin said.
"We added Bitcoin and Ether to our treasury because we wanted to be part of the community. We wanted to show the crypto community that we have skin in the game," Bhasin explained. "Our leadership believes in the technology and all transformative ways it can be used in the community. KPMG is traditionally not in the business of investing in assets. This is probably the first time that something like this would've happened."
At the end of February, KPMG Canada also purchased digital art from the highly acclaimed World of Women (WoW) NFT collection.
"The reason why we bought the WoW NFT is that we need a lot more women in crypto and women in tech in general. I feel the crypto industry could use a lot of that majority and sensibility that comes with a lot more women in the space and how they could contribute," Bhasin stated.
Regulation and institutional adoption
Regulation has been front and center this summer as U.S. regulators are stepping up their oversight of the crypto industry following the price collapse.
But, according to Bhasin, countries have a lot to learn from each other when setting out regulations, especially since crypto is a global system.
"There are different things that the American and Canadian regulators can learn from each other. In the U.S., there is no spot crypto ETF. In Canada, we've had a spot ETF for a couple of years. That's one thing the U.S. regulators could take from the Canadian regulators," he said.
Overall, regulations are a good thing for the industry — they offer protection to consumers and investors. However, international cooperation will be important because siloed regulations will be detrimental to the system, Bhasin added.
"The more collaboration we have between regulators across countries, the more benchmarking each of the countries' regulators can do to ensure that they are looking at what can work well and be good for the overall ecosystem," he said.
Bhasin also believes that the traditional Howey Test might not be the right one for the crypto space, especially regarding Bitcoin and Ethereum. "We need a new framework to assess these assets and not try to retrofit a test adopted when digital assets weren't even a thing," he said.
The Howey Test, which refers to the U.S. Supreme Court case for determining whether a transaction constitutes an "investment contract" and therefore should be considered a security, is often used for crypto. Under the test, an investment contract is an investment of money by entrepreneurs in a common enterprise with an expectation of profits from the efforts of others.
Institutional involvement in crypto continues to grow, and the price drop could encourage some new players to get involved.
"Those institutions that have been looking to get into the space have been doing due diligence and research for several months or years. For many, the decision-making would not depend on where the market is. But for some, this is an opportunity because of where the prices are. If they didn't want to come in when Bitcoin was at $60,000, the current $20,000-$24,000 range could be a good time for them to come in," according to Bhasin.
Going forward, KPMG is keeping a close eye on the Ethereum Merge. "At KPMG, we are all about being sustainable and ESG compliant. For us, keeping a close eye on the Merge is critical because it's going to move from proof-of-state to proof-of-work and reduce the emission by 99%," Bhasin said.
To learn more about the Merge planned for September 15, click here.