A lack of regulation is the “biggest single barrier” to adoption, according to the analyst

BTIG CEO and financial analyst Mark Palmer joins Yahoo Finance Live to discuss comments from Sam Bankman-Fried’s first live performance since FTX’s collapse, the impact of FTX’s collapse on other crypto platforms, and the outlook for crypto regulation.

video transcript

– Mark Palmer, Managing Director and Financial Analyst at BTIG, joins us now to discuss how this will impact businesses. Mark, great to have you here with us on the show today. First I just want to hear your reaction to what you heard from SBF yesterday. Did it come across as real or authentic? And how is his comment really rated by the broader crypto landscape?

MARK PALMER: Yes. I think what I gleaned from his comments was what we just heard. What can be learned from the FTX debacle? What can investors take away from this as they look for other opportunities within crypto and Web3? And I think what he mentioned, especially with regard to the proof of reserve, is exactly right. What we need to see from all crypto platforms, especially the centralized ones that we look back on.

All the problems we saw in 2022 were centralized platforms. Decentralized financing, on the other hand, developed very well. So the question is how some of these elementary aspects of blockchain technology, the transparency, permissionlessness, what we call trustlessness, where you don’t have to trust any intermediary, how can these be taken over by big centralized platforms like Coinbase, Galaxy Digital and so on , so that consumers have more convenience when engaging with these platforms.

An example of this is what we’re seeing at Coinbase with Coinbase Wallet, which allows users to keep their private keys associated with their crypto while continuing to use their platform. We also think we will bring a lot more self-custody into play. We are already seeing that platforms like Ledger and Trezor have seen huge demand for their products after the FTX collapse.

The story goes on

– Mark, something I’m kinda struggling with here when we talk about crypto and the stack we saw followed by the pullback is a lot of people still don’t really get it. And with a lot of investment, you don’t necessarily have to understand – you understand to a degree.

Do I need to understand exactly what is happening on the blockchain behind my investments da da da? Or, from a regulatory perspective, do I just want to avoid losing my money because the company I’m investing in is using my money to invest elsewhere within the organization on its own account? I think what I’m asking is, don’t we need that kind of regulation just to give people who want to invest in this stuff a baseline of reassurance?

MARK PALMER: I think not only do we need it, I think it’s inevitable that we will see it. Congress in particular will provide a regulatory response to this. In recent years, legislative proposals for a regulatory framework have been circulating within Congress. They never got off the committee. They weren’t really very high on the priority list.

So what’s interesting is that as FTX collapses, we’ll see Congress pay more attention to that. Based on the comments we’re hearing from members of both houses, that appears to be the case. This will now be reflected in consumer protection for small investors. But I think in the big picture it really means a lot in terms of the potential for institutional adoption of crypto because the biggest obstacle to institutional adoption has been the lack of a regulatory framework.

Institutions do not want to crowd into a space when there is still potential for carpet trains and the like. And what we expect is that we will see regulatory guardrails. We will see more approved decentralized finance, which means there will be know-your-customer and anti-money laundering screening on the front end. We are already seeing Coinbase partnering with Uniswap, the largest decentralized exchange, on its backend in an approved manner.

So you are looking for KYC and AML. This offers institutions more convenience as they can participate in liquidity pools and the like and enjoy the benefits of decentralized finance without the downsides. So I think what could happen as a result of all this is, on the one hand, more consumer protection, but it really creates the potential for more institutional adoption of crypto. Crypto is a strange asset class because it’s the only one where retail has adapted first and then institutions lag behind. We think what happened here will likely cause that to change.

– Mark, I want to ask a few more questions here. And we have to fight our way to the end. But if we think about Congress, they haven’t always shown the best understanding, especially when it comes to some of the most advanced technologies, including DeFi. What three smart questions could you ask at the hearings, one starting today and another on March 13?

MARK PALMER: Here too, in my opinion, it is important to learn from the mistakes made. I think the questions I would ask are: What could be done to give retail and institutional investors a better sense that there are sufficient reserves on a platform that supports deposits? And that is the so-called proof of reserves, both on the assets and on the liabilities side.

Additionally, I would ask what kind of technology can be implemented that could make investors safer? And here we come to a part of crypto custody and self-custody that allows users to control the private keys that are critical to cryptocurrency custody and ownership.

And I think one of the final questions I would ask relates to human error — which was really at the root of it all. It wasn’t crypto that went wrong here. They were people behaving like people, which is what we’ve been observing for ages. What can be done to take the human factor out of the equation? In other words, really doing crypto the way it was intended since Satoshi published his Bitcoin whitepaper in 2008.

– Human error, I think maybe a nice way of putting it. But I think we’ll find out more as this whole situation continues. Mark, I could talk to you for more than an hour. Forget SBF about all this. But we have to go BTIG chief executive and financial analyst Mark Palmer. Many Thanks. Am grateful.

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