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This article was originally published in IBS Intelligence, on 7 March 2022, and can be found here

Are cryptocurrencies becoming too mainstream?

Lessons learned from KPMG’s investment in Bitcoin and Ethereum

Manoj Mistry, Managing Director, IBOS Association

As cryptocurrencies become ever more mainstream, blue-chip names are anxious not to be left behind in the crypto stampede. With Goldman Sachs predicting that bitcoin will increasingly compete with gold as a store of value, banks and major corporates are eagerly seeking to extend their crypto footprint.

The most recent big name to join them is the Canadian arm of KPMG, which recently announced that it had added ethereum (ETH) and bitcoin (BTC) to its balance sheet, making it the first of the Big Four to invest in decentralised digital currencies.

By doing so, the accounting giant has joined legions of crypto investors worldwide. According to Statista, the global number of Blockchain wallet users has already surpassed 81 million with some analysts estimating that the total figure now exceeds 200 million. Figures published by the Financial Conduct Authority (FCA) estimate that there are around 2.5 million cryptocurrency owners in the UK.

KPMG’s strategic decision can be interpreted as a reflection of the market’s direction of travel: an explosion of investor interest in crypto and an increasing participation in other blockchain technologies, such as NFTs (non-fungible tokens) and decentralised finance (DeFi) technology, that has simply become too big to ignore.

The managing partner at KPMG’s Canada office, Benjie Thomas, was distinctly upbeat when he announced the move. “This investment reflects our belief that institutional adoption of cryptoassets and blockchain technology will continue to grow and become a regular part of the asset mix,” he said.

A few weeks later, KPMG Canada went further: buying a World of Women NFT (Woman #2681) for a reported 25 ETH (US$73,000), acquiring an Ethereum Name Service domain name – a tool that makes cryptocurrency addresses more user-friendly – and minting kpmgca.eth.

KPMG is not alone. Many banks have also recognised cryptocurrencies as a maturing asset class: 55 per cent of the world’s 100 biggest banks by assets under management are now investing directly or indirectly in companies and projects related to cryptocurrencies and blockchain, according to Blockdata.

In allocating bitcoin and ethereum to its corporate treasury, KPMG also follows in the footsteps of major companies such as MicroStrategy, Square and Tesla, which are now holding crypto on their balance sheets. Tesla’s CEO Elon Musk has been a keen advocate of crypto, having publicly stated that his personal portfolio includes bitcoin, ethereum and dogecoin. Meanwhile, Tesla’s most recent accounts reveal that the company held almost $2 billion worth of Bitcoin holdings last year.

The absence of specific regulation is arguably part of crypto’s appeal. But as the combined market value of all cryptocurrencies breached the $2 trillion mark in 2021, financial markets and investors knew that key global regulators were set to respond to what they perceived as high levels of risk.

UK regulators have set the rhetorical pace. The FCA and the Bank of England have both cautioned investors in uncharacteristically strong language to help them appreciate the risks: fraud, hacking, money laundering, sanctions risks, as well as general market and credit risks.

In the US, Treasury Secretary Janet Yellen has repeatedly suggested that fundamental questions exist about the legitimacy and stability of cryptocurrencies and that the US should implement an appropriate regulatory framework.

Despite these siren voices, bespoke regulatory regimes for crypto have not yet been put in place on either side of the Atlantic, although it can only be a matter of time before they are.

Canada also has no crypto-specific regulations. Instead, cryptos are regulated under the country’s securities laws – part of the mandate of Canada’s 13 securities regulatory agencies (SRAs), established by ten provincial and three territorial governments.

Not considered legal tender under the Bank of Canada Act, cryptocurrencies are classified as a commodity rather than money, while Canadian securities laws treat cryptos as tokens, classifying them as securities.

But Canada’s regulatory framework is distinctly more supportive of crypto than the US, which may have been a driver for KPMG’s local move into crypto. Notably, the Canadian Securities Administrators (CSA) allow financial innovations to test the waters for a designated period of time, during which they are exempt from the compliance rules under existing securities regulation.

The CSA is also breaking fresh ground in defining the contractual right to custodied crypto assets as a security, making Canada the first jurisdiction in the world to do so. This potentially puts Canadian crypto players on a path to experience the type of regulation that is not yet seen elsewhere.

Like other cryptos, bitcoin and ethereum are regarded by investors as speculative assets. Beyond their inherent volatility, KPMG’s decision to add digital assets to its balance sheet creates other potential risks including anti-money laundering (AML) and the future of tax reform.

For the partners of KPMG Canada, there are also compliance considerations. These extend to areas for which banks are typically responsible: security and AML checks. Notably, the International Financial Reporting Standards (IFRS) has no specific provisions that detail how to account for cryptocurrencies.

Big corporations’ involvement in crypto by is both exciting and welcome. Having crossed that investment Rubicon, however, they will have to implement and maintain effective regulation and supervision in order to prevent white-collar crime, money laundering and cybersecurity breaches, among other issues.