While retail investors on Main Street have stepped right into the Wild West of the digital asset market, Wall Street has held back. Security and compliance issues around cryptocurrency have made this new financial frontier too risky for institutions to cross.
But as the perfect economic storm looms overhead, big investors are dipping their toes. Pension funds, family offices, and pioneering hedge funds are now pushing into the cryptocurrency market amid suggestions that bitcoin could be an ideal hedge against the effects of unprecedented quantitative easing.
For these institutional players to settle and take advantage of the cryptocurrency gold rush, they need a trading venue that offers similar standards of security to traditional financial houses, and full compliance with emerging regulations.
Taming the Wild West of digital assets
Unlike fiat money, cryptocurrency is controlled by cryptographic keys. Storing these keys safely has proven challenging for custodians, and cryptocurrency transactions authorized with stolen keys cannot simply be rolled back because they are permanently fixed on the blockchain.
This makes crypto assets very attractive to thieves, and has led to several high-profile security breaches, such as the hack of Mt. Gox, which cast a shadow over the nascent industry in the eyes of institutions. These big players typically hold much larger amounts of capital than retail traders, and are bound by fiduciary laws to work with regulated custodians that cannot stomach such counterpart risk.
To allay the concerns of institutional investors, professional cryptocurrency exchanges must meet the same security standards as traditional financial houses.
eToroX employs the same cybersecurity expertise used to protect Israel’s strategic assets to secure customer funds against cyber-attacks. This ensures adequate protection against even the most powerful hacks.
The infrastructure of the eToroX platform is kept secure with code reviews and a bug bounty program that incentivizes security researchers to expose potential vulnerabilities. Customer funds are custodied in military-grade cold-storage wallets that comply with FIPS 140 standards.
Customers are required to complete KYC level 3 ID verification and are encouraged to protect their accounts with 2FA.
Crossing the regulatory frontier
High-profile security breaches of cryptocurrency exchanges have caught the attention of governments, which have responded by starting to erect a regulatory framework around this fast-moving asset class.
In the aftermath of the first major cryptocurrency exchange hack of Mt. Gox in 2014, Japan quickly devised a set of rules for the fledgling industry. The country was then followed by other East Asian nations, and small jurisdictions like Malta and Gibraltar seeking to attract up-and-coming cryptocurrency companies.
Over the past 12 months, the advent of Facebook’s Libra has prompted slow-moving Western democracies to issue their own calls for regulation. U.S. Secretary Treasury Steven Mnuchin said in February he was preparing to roll out “significant new requirements” for cryptocurrency, and the EU has placed European crypto exchanges firmly under its purview with the Fifth Anti-Money Laundering Directive (5AMLD).
For institutions, compliance with these emerging regulations is at the top of the agenda.
Trading on a compliant exchange means avoiding the possibility of future regulatory scrutiny, and resting in the knowledge that the platform follows shared standards to protect market participants from cyber-attacks, illicit payments, fraud, or theft.
eToroX is a regulated distributed ledger technology (DLT) provider licensed by the Gibraltar Financial Services Commission (GFSC).
Over the last fifty years, Gibraltar has transformed from a shipping-based economy to an international finance hub. And with the enactment of a pioneering regulatory regime for DLT in January 2018, the self-governed British territory began to welcome cryptocurrency and blockchain companies from all over the world.
Several industry-leading cryptocurrency firms have since chosen the Rock for its robust regulatory framework, which balances protecting market participants with creating flexibility for innovation.
To filter out companies that can’t meet the high standards, the GFSC ensures all Gibraltar-based blockchain businesses uphold the nine principles of the DLT framework.
These include moral principles like honesty, integrity and customer-focus, along with practical pointers on managing risk by allocating resources effectively and protecting client assets with good record keeping and solid cyber security protocols. The guidelines also extend to corporate governance and guarding against financial crime with KYC and AML procedures.
With hardened-security and full regulatory compliance, eToroX meets the same professional standards as traditional financial houses—giving institutions the confidence needed to cross the new frontier and take part in the cryptocurrency gold rush.