Crypto: Lack of regulation the ‘single biggest impediment’ to adoption, analyst explains

BTIG Managing Director and Financials Analyst Mark Palmer joins Yahoo Finance Live to discuss commentary from Sam Bankman-Fried's first live appearance since the collapse of FTX, how the collapse of FTX will impact other crypto platforms, and the outlook for crypto regulation.

Video Transcript

- Joining us now to discuss how this will impact companies moving forward is BTIG Managing Director and Financials Analyst Mark Palmer. Mark, great to have you here on the show with us today. First, I just want to get your reaction to what you heard from SBF yesterday. Did he come off as genuine or authentic? And how will his commentary really be evaluated by the broader crypto landscape?

MARK PALMER: Yeah. I think what I took from his comments were what we just heard. What can be learned from the FTX debacle? What can be taken from that by investors as they look for other opportunities within crypto and Web3? And what he mentioned, especially with regard to proof of reserves, I think is spot on. What we're going to need to see from all crypto platforms, particularly the centralized ones, which let's look back.

All of the issues that we saw in 2022 involved centralized platforms. Decentralized finance in contrast performed extremely well. So the question then is how can some of those elemental aspects of blockchain technology, the transparency, permissionlessness, what we note as trustlessness where you don't have to trust an intermediary, how can those be adopted by large centralized platforms the likes of Coinbase, Galaxy Digital, and so forth so that consumers will have more comfort when they're engaging with those platforms.

An example of that is what we see with Coinbase with Coinbase Wallet, which enables users to hold on to their private keys associated with their crypto while still using their platform. We also think we're going to see a lot more of self-custody put into play. We're already seeing that with platforms like Ledger and Trezor have seen tremendous demand for their products in the aftermath of the FTX collapse.

- Mark, something that I sort of struggle with here when we're talking about crypto and the pile in that we saw followed by the pullback is that a lot of people still didn't really understand it. And with a lot of investment, you don't need to necessarily understand-- like, you understand to a certain degree.

Do I need to understand exactly what's happening on the blockchain behind my investments, da, da, da? Or do I just want to from a regulatory perspective that I'm not going to lose my money because the company that I'm investing with is using my funds to invest on its own account somewhere else within the organization? So I guess what I'm asking is, don't we need that kind of regulation to just give the baseline of reassurance to people who want to invest in this stuff?

MARK PALMER: I think not only do we need it, I think it's inevitable we're going to see it. There will be a regulatory response to this from Congress in particular. Over the last few years, there have been bills that have been bandied about within Congress about a regulatory framework. They never got out of committee. They weren't really very high on the priority list.

So what's interesting is that with the FTX collapse, we may see Congress pay more attention to this. Based on the commentary that we're hearing from members of both houses, that appears to be the case. Now, that will translate into consumer protection for retail investors. But I think, bigger picture, it really means a lot with regard to the potential for institutional adoption of crypto because the single biggest impediment to institutional adoption has been the lack of a regulatory framework.

Institutions don't want to pile into a space when there's still the potential for rug pulls and this sort of thing. And what we anticipate is that we will see regulatory guardrails. We're going to see more of permissioned decentralized finance, which is to say that there's going to be know your customer and anti-money laundering screening on the front end. We already see Coinbase working with Uniswap, which is the largest decentralized exchange, on its back end in a permissioned way.

So they are screening for KYC and AML. This provides more comfort to institutions that they can get involved with liquidity pools and the like, get the benefits of decentralized finance without the downside. So I think what could occur as a result of all of this is, yes, more consumer protection on the one hand, but it really sets up the potential to see more institutional adoption of crypto. Crypto is an odd asset class because it's the only one in which retail adapted it first and then institutions are lagging behind. We think that what has occurred here is likely to cause that to shift.

- Mark, I want to get a few more questions in here. And we've got to hustle to our finish. But when we think about Congress, they haven't always displayed the best understanding, especially around some of the most advanced technology, DeFi included. What are three smart questions that they could ask as part of the hearings, one of which is commencing today, another one going to be with the House Financial Services Committee on December 13.

MARK PALMER: Again, I think what needs to be done here is to learn from the mistakes that have been made. And so I think the questions I would ask are, what could be done to give a better sense to retail investors and institutional investors that there are sufficient reserves backing deposits on a platform? And that's what comes back to what's known as proof of reserves, both on the asset and liability side.

Beyond that, I would be asking, what kind of technology can be implemented that could make investors safer? And this is where we get into some of the custody and self storage of crypto, which enables users to control the private keys, which are critical to storage and ownership of cryptocurrency.

And I think, finally, one of the questions that I would be asking is with regard to the human error-- which really was what was at the root of all of this. It was not crypto that went wrong here. It was human beings acting like human beings, which we have seen since time immemorial. What can be done to take the human factor out of the equation? In other words, to truly make crypto permissionless the way that it was intended to be since Satoshi came out with his Bitcoin whitepaper back in 2008.

- Human error I think is maybe a nice way of putting it. But I guess we'll find out more as this whole situation goes on. Mark, I could talk to you for more than an hour. Forget about SBF about all of this. But we got to go BTIG Managing Director and Financials Analyst Mark Palmer. Thanks so much. Appreciate it.