It started with Donald Trump, who last week lashed out at cryptocurrencies and bitcoin, saying they are “not money” and he is not a “fan”.

Now, finance ministers from the rest of the G7 group of major economies find themselves in the unusual position of agreeing with the US president. On Thursday they expressed unease about the use of digital assets for money laundering, tax evasion and drug trafficking.

Crypto-enthusiasts — not typically keen on government intervention at the best of times — could be forgiven for thinking that regulators are seeking to stamp out the growth of digital assets in a war on innovation.

But regulators’ high-profile concerns are relatively narrow. They focus on Facebook’s proposed Libra project and other crypto coins, as part of a focus on consumer protection.

In wholesale markets, institutions wanting to trade crypto-related assets are receiving rather different signals. They believe watchdogs are getting more comfortable with this new world.

In the past month the UK approved its first asset manager that specialises in cryptocurrencies, while LedgerX won US approval to trade bitcoin futures and swaps that are settled in the digital currency.

This is a critical change. It means customers will be paid in cryptocurrency when the contract expires, in the same way that buyers of commodity future take physical delivery of oil and foodstuffs. Other exchanges have applied for similar treatment for crypto and hope to win approval.

Optimists believe this support will herald the arrival of fund managers and banks into the crypto market. After all, bitcoin’s recent sharp price moves offers traders some rare and welcome volatility in an otherwise listless market.

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Some will no doubt test the water. But the problem remains finding someone to trade them on behalf of the customer. By law, funds have to keep securities with a qualified custodian, and that broker must be able to prove it can keep the assets safe from, for example, hackers.

But a crypto asset is not necessarily a security, legally-speaking. It is just a string of numbers and letters. It can be difficult to recover lost or stolen assets, or even to prove possession or control.

Annette Nazareth, a partner at law firm Davis Polk, and a former SEC Commissioner, notes that for banks, trading crypto assets is a legal grey area. Without showing they can meet the rules, they cannot be approved for this activity, she said.

Last week, US regulators suggested they would be more comfortable with brokers just arranging deals and not holding the digital securities.

“For the most part, [that] statement doesn’t resolve these uncertainties,” said Ms Nazareth.

Despite the somewhat more constructive approach in wholesale markets, national authorities are still keen to know who watches the watchmen.



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