Investment banks will need to build understanding around crypto assets and treat them as any other asset and overall portfolio solution before they become mainstream, according to panellists during the Cryptocurrency, ICOs and Blockchain panel discussion at the 15th Annual Europe Structured Products & Derivatives conference at the Etc.venues, County Hall, in London on February 8.

Products linked to bitcoin were introduced in the structured retail products market in Switzerland in 2016, with Germany and Sweden following suite the following year, with the product becoming the most traded products on the Frankfurt and Stuttgart stock exchanges, as well as over-the-counter. "The very core of bitcoin is the question of what is it in legal terms [because] the legal classification has a lot of implications that concern the type of product, its availability for trading, license and disclosure requirements," said Peter Chapman, senior associate at Clifford Chance.

The features and their analysis vary across different currencies as well as jurisdictions, with regulators in the US and Asia fairly active in regulation and investor protection from some of the worst fraud cases [associated with cryptocurrencies], according to Chapman. "However, the characterisation dispute still "raises parameter issues" about the span of regulation which, so far, has been primarily concerned with the risk of fraud," said Chapman.

Chapman outlined six types of bad behaviour associated with cryptocurrencies: inappropriate use for illegal purchasing of goods and services; miss-selling of currencies to investors insufficiently informed about the accompanying risks; market abuse in the form of driving market movements through activity; fraud; infrastructure issue with rising number of attacks on digital wallets; and compliance. "We will see an increasing focus on securities and financial regulation as the means for these [digital] assets to be brought into a regulatory framework," said Chapman.

According to Mona El Isa, founder and chief executive officer of Melonport, tokens are just technology that can be coded to look like digital equities or bonds, currencies, utilities or settlements, depending on investor needs. The hard-coding involved does not allow for any governmental or regulatory influences, according to El Isa. "I see it as an asset class with different sub-classes, but essentially, a token is code," said El Isa.

Crypto is an infrastructure with multiple uses, including transaction, storage of value, and utility, and calling it a currency is a misnomer, according to Michael Paritee, chief executive officer at Serrada Capital. "Holding bitcoin is just like having a bank account and law enforcement agencies love it because they are able to trace your transactions," said Paritee.

Thinking of cryptocurrencies as anonymous is part of a big misunderstanding, according to Sohail Raja (pictured), head of execution platforms at Societe Generale. "From an institutional perspective, our benchmark on how to treat bitcoin is similar to the CME and CBOE and the futures product, which would be more applicable from a structured products point of view," said Raja.

In the context of retail investments, "crypto is the exact opposite of traditional financial markets, with retail traders everywhere because it is accessible and understandable for them", according to Paritee. "Bitcoin's recent price movements are not entirely shocking, seeing that many of the investors are long-term holders of bitcoin," said Paritee. "Some of the early retail investors in bitcoin entered finance from the side and have become very financially intelligent, trading in options and futures. This is unlikely for retail in the traditional markets which have moved in the opposite direction with robo-advisers."

Unlike other asset classes that were pioneered years ago, such as junk bonds, exchange-traded funds, commodities and emerging markets, the barriers to entry the crypto market today are very low, and the high number of retail investors involved is a red flag, according to El Isa. "The irony is that retail got in before institutions because legal cannot figure out how to structure crypto," said El Isa. "Ultimately, everyone has access to the same information and, probably, retail investors have more time to digest it than do bankers with a full-time job."

Millennials are moving away from stocks and other established asset classes, according to Raja. "What is interesting from an investment point of view is the number of young people that, led by their frustration from the [traditional] financial markets, take on board crypto assets," said Raja.

Regarding future bitcoin-based investment solutions, the panel concluded that there is a 'long queue of bitcoin ETFs that are only slowed down by regulatory confusion'. Regulators are waiting on few more settlements on the futures market to take place to establish what is going on and what ETF providers might be getting into, according to Paritee.

"We are now in a nice sweet spot with a lot of growth in bitcoin and an increasing competition in the business across countries," said El Isa. "Europeans in particular are keen not to miss this wave."

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