The rise of cryptocurrencies has generated a lot of attention, with early adopters turning billionaires and the masses joining for a presumably quick path to wealth and excitement.
For Saxo, an early technology pioneer and a company that always keeps a keen eye on the future, it has been both fascinating and concerning to observe these developments and the speed with which the hype has spread. And it is precisely our experience, know-how and focus on providing access to investment and trading opportunities underpinned by regulatory certainty and transparency that has made us consistently sound a note of caution when it comes to cryptocurrencies.
To help clients and wider stakeholders understand the rationale behind our thinking, we have sketched out what we consider to be a responsible and prudent approach to the cryptocurrency space, as already evidenced by remarks made by our founder Kim Fournais in January 2018 when he called for better consumer protection and regulation of cryptocurrencies.
Where we are today?
Today, cryptocurrencies come with a range of weaknesses: large energy consumption for mining proof-of-work based cryptocurrencies, oft-exorbitant fees for buying and selling them on exchanges, exposure to cybersecurity risks and uninsured theft, unclear tax treatment of returns generated and last but not least, dramatic spikes in volatility. Add this the high risks and lack of transparency in the ICO market and it is a cocktail clearly warranting caution.
As these views have become increasingly verified by the course of events, I wanted to reiterate and give a bit more flavour: our reservations do not imply that cryptocurrencies cannot mature into an interesting asset class or that there is no merit in the underlying technology, but as things currently stand, investors and traders must tread carefully to avoid the pitfalls of an immature asset.
In our view, the best way for the majority of investors and traders to get exposure to cryptocurrencies is through exchange-traded notes. These ETNs are listed funds that track the spot price of major cryptocurrencies such as Bitcoin and Ethereum. ETNs give easy and transparent exposure to the underlying cryptocurrencies, and they can be held in the same portfolio as your other investments in stocks, ETFs et cetera (rather than holding the actual coins in a separate wallet).
Crucially, returns are taxed and losses are deductible in most countries. ETNs listed on the Stockholm Stock Exchange are available on our platform.
Why not be more aggressive?
I am often asked why Saxo does not take a more aggressive approach and offer, for example, highly leveraged CFDs on cryptocurrencies. The demand is there, and many online trading providers have made this the cornerstone of their offerings in the past year or so. The short answer is that we take a long-term view; offering leveraged products on highly volatile products is not in our clients’ best interest. Such an offering which would generate short-term returns for Saxo, but would go against our central strategic aim of having long-term, win-win relationships with our clients.
This approach explains the longevity of our client relationships and is one of the key reasons why the average Saxo client has been with us for more than five years.
People who raise a cautionary note when it comes to cryptocurrencies have been accused of not seeing the future. Nothing could be further from the truth when it comes to Saxo. We launched our first digital trading platform in 1998, became a fintech before the term was invented and have remained at the forefront of technology ever since. We firmly believe that new technology is key to delivering better and cheaper investment opportunities, and to allowing more people to take control of their financial destiny to support their goals.
This does not mean, however, that we should not ask critical questions when we see proof-of-work mining consuming more electricity than entire countries, clients being charged exorbitant fees with no transparency, popular exchanges with proprietary trading desks betting against their clients, and high volatility leaving ordinary investors with empty wallets and zero consumer protection.
What will it take?
The first step towards a maturing cryptocurrency market is to have regulation in place that protects investors.
The investment industry is a highly regulated space and providers have to comply with a large number of consumer protection requirements. The efficiency and the transparency of the regulated markets is what has contributed to their growth and success.
The cryptocurrency market runs counter to this trend and remains largely unregulated. Fees are high and opaque, with transaction costs often over 10% to simply buy and sell. Trade terms are often even more opaque, with investors not knowing whether they will get a fair price or whether the broker is placing its own interests first.
It is a little ironic that the new MiFID II directive came into force at the same time as cryptomania reached its peak in early 2018. Just as financial providers facilitating investing and trading in highly regulated asset classes were being asked to ensure that end investors were adequately informed about investment risks and fees, and to ensure that marketing was appropriate, the same investors were being targeted with advertising from unregulated providers promising enormous returns from 'riding the Bitcoin wave'.
Such false and misleading claims illustrate the urgent need for better consumer protection.
The next key requirement to ensure cryptocurrencies can become a viable investment asset is a better understanding of how returns from cryptocurrency investing will be taxed. Many jurisdictions are yet to clarify the tax question, which leaves returns from cryptocurrency investment untaxed. This is blatantly unfair when you look at the high tax rates on income and other investments in most developed countries, and it distorts the investment market.
The fact that such returns are currently untaxed can leave the investor in a dire position of uncertainty as to whether tax returns are filled correctly or not. Additionally, the rise of regulated and insured custodians in the space will reduce counterparty risk and therefore benefit investors.
Several firms such as Nomura, Fidelity and SIX are developing custodial solutions that will satisfy even the most stringent controls. Established institutions are beginning to offer custodial services and relatively new crypto firms such as Coinbase and itBit are beginning to offer custodial services to institutions. Regulated custodians are one of the key reasons there has been a lack of institutional investment directly into cryptocurrencies, and it is key to the adoption of cryptocurrencies in traditional markets.
ETNs remain the most prudent way to get exposure
The answer to the question of why Saxo is not more aggressive when it comes to trading cryptocurrencies is that we continue to follow the market closely and will only give clients direct access to the market when it fulfills some of the key criteria which make other asset classes investable securities.
Until such time, we see ETNs as the most prudent and transparent way to get exposure to major cryptocurrencies.