It’s a common refrain: institutional investors will drive demand for Bitcoin and other cryptocurrencies, prompting a new crypto bull run. But although there have been flickers of interest from banks and hedge funds, the floodgates have yet to open. In 2019, 70 crypto hedge funds shut down, while a report from SFOX in December found that, “Funds and institutions may still have some trepidation when it comes to investing in cryptocurrencies.”

So what’s causing the hold-up? At DAS London, representatives of custody providers and investment management firms took to the stage to discuss why institutional investors have yet to take the plunge into crypto—and what’s going to happen when they do.

Client driven industry

For institutional investors to get involved in crypto, there needs to be demand from clients, said Pete Najarian, chief revenue officer at BitGo. “Financial institutions are led often by their clients, it's not the reverse,” he pointed out. “The great fiasco that took place in 2008 of the mortgage bubble was not something that was created by Wall Street out of thin air, they were led there by this huge demand for yield that existed by their clients. So until we see the clients of big financial institutions clamoring to own these assets, we're not going to see them come in in a huge way.” Until then, Najarian said, institutions will restrict themselves to “dabbling” with digital assets.

Demetrios Skalkotos, global head of Vault at Ledger, agreed. “They’re not going to do anything unless the clients are asking for that,” he told Decrypt, adding that institutional investors are currently assessing client demand.

Volatility, valuation and immutability

What’s giving institutional investors pause is a combination of different factors, said Najarian, including volatility. “I think volatility scares traditional institutional investors,” he said. “The level of volatility that exists in this space is unlike anything they've ever seen.”

Valuation metrics also matter, Najarian said. “We don't have a traditional system of valuing assets that meets what traditional financial institutions are used to,” he said, adding that when he sits down with institutional investors, “they start asking questions about valuation and frankly there aren't good answers.”

Institutional investors are also concerned by one of cryptocurrency’s defining traits—its immutable ledger. “The concept that everything in traditional finance is reversible and everything in crypto finance is irreversible is kind of horrifying for someone who's managing third party capital,” said Najarian.

Skalkotos agreed, pointing out that regulatory clarity is currently lacking. “You don't have a method in place if someone does extract your keys; your funds are completely gone,” he told Decrypt. “There's that element of, 'Okay, I can be my own bank,' but there's no repercussions, and there's no scalability there—so how do we address that?”

The good news is, regulators are starting to make their presence felt. “A lot's changed in the last four weeks,” said Najarian. “We've got some clarity out of BaFin now, we know that Switzerland has been quite crypto-friendly. Jurisdictions in Asia are becoming more clear, Japan's got some clarity around how custody will work and how to hold private keys. And then obviously the comments by the SEC Commissioner were a positive surprise.”

Positive movements

The growing clarity around regulations is just one reason for optimism. “I think the arrival of brand new custodians is not a bad thing; it's actually a healthy sign for the business overall,” said Najarian.

There’s also a growing influx of talent moving over from the world of traditional finance to the world of crypto. “The number of very experienced, sophisticated, intelligent folks from traditional finance that are leaving big jobs to come over, has been pretty astounding and I think it's been underreported,” Najarian said. “From where I sit, $10,000 or even $20,000 in Bitcoin today is a very different $10,000 or $20,000 than it was two years ago, largely because of the infrastructure of people that's been set up to really take advantage of the space as we go through the next bull run.”

Traditional fund managers are focusing on asset tokenization opportunities, said Kara Kennedy, custody product manager and director at BNY Mellon. “They'll be asking us to participate and open our eyes about what that custodian role might look like,” she said, adding that BNY Mellon’s role as a custodian could change in its form. She said that some clients will likely want a full-service model, where they’re not directly connected directly to platforms or networks themselves. “Then I expect that there would also be clients who would want to sit alongside us and be either directly engaged themselves,” she added. “That's something that we need to involve in our model to keep up pace as well.”