The Inevitability of Institutional Crypto

The past two weeks have seen a flurry of institutional activity in the blockchain space. Nasdaq is reportedly developing a platform for the issuance and trading of security tokens. Bakkt, a subsidiary of ICE, announced plans for a cryptocurrency trading platform that will offer physically-backed futures contracts. Most notably, Fidelity, one of the largest asset managers in the world, is building a digital assets custody and trading solution for institutional investors.

Institutional involvement in the crypto world may seem paradoxical if not wholly counter to the ideological underpinnings of the decentralization movement. However, their involvement was a near inevitability, bound to happen due to fundamental economic, political, and social realities of the industry.

Philosopher Henrik Karlstrøm provides a loose argument positing why Bitcoin (and similar cryptocurrencies) struggle to maintain ideological purity as anti-institutional hedges. Karlstrøm applies the sociological theory of embeddedness to Bitcoin. This theory states that economic markets are embedded in a larger social context, “with rules that are mediated by social ties and institutions that are the result of historically contingent developments.” Markets only exist and function if there is significant effort put into maintaining them; thus, it is impossible to study markets without considering their larger embeddedness in social networks, government regulations, and political institutions.

For example, Karlstrøm argues that the functions of a central bank can be identified as embedded within a specific political regime, which believes state control of currencies is necessary for stability. But Bitcoin is not wedded to any traditional social, political, or economic institutions, providing a unique opportunity by which to test the notion of embeddedness.

Ultimately, Karlstrøm argues that Bitcoin is not entirely divorced from traditional institutions because it is materially embedded in physical infrastructure that emerged from pre-existing societal structures. Bitcoin relies on a whole host of physical infrastructure including miners, coders, the infrastructure of the internet, etc. Thus, Bitcoin has no choice but to be physically embedded in the material world — and this has consequences.

From the consolidation of mining by companies like Bitmain to the prevalence of centralized exchanges with institutional ties, cryptocurrencies have no choice but to engage with traditional economic systems. Karlstrom writes, “Even an effort like Bitcoin, which in its most utopian incarnation promises to free money and the social ties that are associated with it from what is seen as the dysfunctional institutions of modern economies, cannot decouple itself from a whole host of material institutional issues.”

The paradox of Bitcoin is that it strives to be removed from traditional institutions of society, while at the same time relying on them to expand. Patrick Murck, a fellow at the Berkman Klein Center at Harvard said, “If you’re constructing a system that really is tethered to the existing institutions of the old world, you’re going to be bound by the rules of the old world.” Bitcoin’s real-world implementation proves that just because a technology promises dis-intermediation and decentralization, doesn’t make it resistant to traditional social, political and economic structures.

Thus, it is no surprise that institutions have taken such a strong interest in the crypto space. Bitcoin and similar cryptocurrencies emerged on the outskirts of a highly regimented economic system that tends to engulf everything it touches. Ultimately, we must be prepared for the moment when “institutional crypto” is no longer a curious paradox, but rather the industry norm.