A month since their historic approval, digital asset observers remain captivated by spot Bitcoin ETFs – and with good reason. While volumes are down from the $4.5 billion moved on the first trading day, market activity remains substantial, and underlying spot Bitcoin just had its most active month since May 2022, before widespread market turmoil plunged us into crypto winter.

In many ways, this moment parallels a market to which Bitcoin is often compared: gold. Within seven years following the 2004 launch of the first gold ETF, the price of the underlying commodity more than quadrupled as institutions acted upon the convenience, security and comfort of the new product. That journey is no doubt an exciting prospect for digital assets – but to achieve it, the industry cannot afford to rest on its laurels.

To state the obvious, while gold has been traded since antiquity, Bitcoin was invented 15 years ago. There are still crucial issues in digital asset market structure that, until resolved, will limit its long-term growth. CFTC Chair Rostin Behnam recently summed it up, stating that “market participants, retail and institutional alike, may mistake the technical approval of a product with actual regulatory oversight of the cash commodity digital assets.”

In other words: while ETF approval is a positive development for the market, it’s no replacement for more fulsome market structure reform. Why? It boils down to history and uncertainty.

Catering to Institutions: A Multi-Pronged Effort

Bitcoin ETFs have the potential to address some of institutions’ longstanding concerns about digital assets – particularly custodial complexities and a lack of familiar counterparties and workflows. Unfortunately, that’s just scratching the surface of why firms have largely hesitated to enter these markets.

Institutions have long memories. Instances of fraud and mismanagement at some of the most prominent digital asset firms still loom large. FTX gave privileged access to its Alameda Research arm, operating as an exchange, custodian, broker and hedge fund rolled into one. Three Arrows Capital lost $560 million of client money due to loose lending and collateral management practices. The collapse of crypto-friendly banks like Silvergate and Signature has made it far more difficult for digital-native custodians to operate. And those are just the highest-profile reasons for institutions to give pause.

ETF approval is a positive step toward circumventing some of these fears – and indeed, for some institutions, it may be what spurs them to finally adopt digital assets. But for many, reaching that level of comfort will require significant and continued market structure reform. Here are three of the most logical arenas:

• Regulation – In many cases, hesitancy to adopt digital assets boils down to a lack of regulatory clarity. The current landscape – marked by ill-defined roles and responsibilities, jurisdictional turf wars and inconsistency across asset classes – makes it challenging for institutions to ensure they are operating compliantly, particularly in an international or cross-asset capacity.

  We believe that familiarity inspires confidence. To support true institutional adoption, regulators must implement controls that mirror traditional finance – for example, mandating the separation of core service providers like exchanges, prime brokers and custodians. Much of the turmoil of 2022 stemmed from digital asset firms seeking to be all things to the entire market, creating an unacceptable level of counterparty risk. In Europe, frameworks like MiCA (set to take effect in 2024) go a long way toward providing this clarity; in the US, things aren’t as far along, though initiatives like the SEC’s 2023 proposal to allow only qualified entities to custody digital assets represent a good start.

  This uncertainty will ultimately hinder the growth of Bitcoin ETFs, if that market has clearer guardrails. Bitcoin ETFs should theoretically give rise to an array of new hedging and risk management strategies that could be highly attractive to institutions, but only if they feel secure transacting in the underlying asset. ETFs cannot rise above the realities of the wider digital asset space; it must mature alongside it.

   

• Custody – Today, nearly every Bitcoin ETF on the market uses Coinbase as its custodian. In an industry where single-firm counterparty risk has led to so much chaos, this limited landscape will never maximize institutional adoption. To be clear, the issue is not with Coinbase itself, which has proven to be a stable, responsible actor – it’s about the general concept of an entire market resting on the soundness of one company.

  By making the asset class more attractive for traditional custodians, especially by defining clear accounting rules to accurately reflect risk, and less restrictive for digital-native custodians, we can encourage competition. A better-defined market structure, with a clear separation of roles and strong regulatory oversight, would serve both ends.

   

• Technology – Many of the failures that led to institutions staying on the sidelines could have been prevented through better technology. For example, with stronger collateral management capabilities – real-time alerts, risk controls and rapid liquidation capabilities – failed lenders like Genesis and BlockFi might have recognized their vulnerability much sooner. Elsewhere, continued innovation to support low-latency trading, real-time P&L, portfolio analytics, borrowing and other key functions is vital to making institutions feel confident about adopting digital assets.

It obviously won’t happen overnight, but advancement across all these three areas will address institutions’ most basic fears around digital assets far more comprehensively than the approval of a single class of products ever could.

A Bright Future

Bitcoin ETFs will be a boon for digital assets – that much seems all but certain. Today, we invite you to think bigger than that.

Imagine what these markets will look like when institutional investors have not just an array of convenient access products, but a clear and truly mature market structure. The landscape would be defined by better oversight, more advanced technology and a more robust service provider ecosystem. These reforms are vital to the industry’s ability to go beyond simply enabling exposure to Bitcoin through traditional means – they would bring about extensive access to a wide array of digital assets, unlock sophisticated hedging and risk mitigation strategies and support global, fully compliant crypto trading operations. From there, the sky is the limit. To harken back to the comparison at the beginning of this piece, while gold’s utility is limited by its size and weight, there’s no reason why Bitcoin can’t become the world’s foremost financial market.

That, combined with ETFs, is a powerful vision – and likely an irresistible one for many institutions. The road ahead remains long, but we’re confident that it’s leading to something truly transformative.