The Core Argument
The numbers are no longer possible to ignore. As of October 27, 2017, more than 120 hedge funds are now focused exclusively on bitcoin and digital currencies, according to data from financial research firm Autonomous Next shared exclusively with CNBC. More than 90 of these funds launched in 2017 alone, collectively managing $2.3 billion in assets. The institutional floodgates are opening — and regulators around the world are scrambling to respond.
The rapid professionalization of cryptocurrency investing presents a fundamental tension. On one side, Wall Street veterans like Michael Novogratz — the former Fortress hedge fund manager who is launching a $500 million digital assets fund through Galaxy Investment Partners — are betting big on the space. On the other, government agencies from Beijing to Washington are tightening the screws on unregulated token offerings and digital currency exchanges.
The question is no longer whether cryptocurrencies will be regulated, but how — and whether the regulatory frameworks being developed will nurture innovation or stifle it.
Legal Precedents
The regulatory landscape for cryptocurrencies in late 2017 is being shaped by several key developments:
China’s ICO Ban: In September 2017, China’s People’s Bank and six other government agencies declared initial coin offerings illegal, ordering all ongoing token sales to cease immediately and requiring funds already raised to be returned to investors. The ban sent shockwaves through the global cryptocurrency market, triggering a sharp but temporary sell-off. China’s move remains the most aggressive government action taken against the ICO model to date and has forced many blockchain projects to relocate to more permissive jurisdictions like Singapore and Switzerland.
SEC’s DAO Report: In July 2017, the U.S. Securities and Exchange Commission issued its landmark investigative report on The DAO, a decentralized autonomous organization that raised approximately $150 million through a token sale before being hacked in June 2016. The SEC concluded that DAO tokens constituted securities under U.S. law, meaning that future token offerings meeting the definition of a security would need to comply with federal securities regulations — including registration requirements or valid exemptions.
SEC ICO Warnings: Throughout October 2017, the SEC has continued to issue public statements warning investors about the risks of participating in initial coin offerings. The commission has expressed concern about the lack of disclosure, the potential for fraud, and the possibility that many token sales involve unregistered securities. These warnings, while not carrying the force of law, signal an increasingly proactive enforcement posture.
Potential Scenarios
The current regulatory trajectory suggests three possible outcomes for the cryptocurrency industry:
Scenario 1 — Soft Landing: Regulators in major jurisdictions develop tailored frameworks that accommodate the unique characteristics of digital assets while providing investor protections. Under this scenario, the SEC could establish a new category of regulated digital assets, similar to how the JOBS Act of 2012 created new pathways for equity crowdfunding. Crypto hedge funds operating within these frameworks would flourish, and institutional capital would flow more freely into the space.
Scenario 2 — Enforcement Heavy: The SEC and international regulators take an aggressive enforcement approach, treating most token offerings as unregistered securities and pursuing legal action against issuers and platforms. This scenario would likely suppress the ICO market, drive blockchain development offshore, and delay the maturation of the cryptocurrency industry. The 124 crypto funds identified by Autonomous Next would face significant compliance costs and operational challenges.
Scenario 3 — Patchwork Regulation: Different jurisdictions develop vastly different regulatory approaches, creating a fragmented global landscape. Some countries embrace cryptocurrencies and token offerings with light-touch regulation, while others impose strict controls. This is arguably the most likely outcome and is already taking shape, with China banning ICOs outright, Japan licensing cryptocurrency exchanges, and the European Union exploring its own regulatory framework.
The Timeline
The pace of regulatory development is accelerating. In the United States, the SEC’s Division of Enforcement has established a dedicated Cyber Unit tasked with policing cyber-related misconduct, including violations involving distributed ledger technology and initial coin offerings. The unit is expected to bring enforcement actions against fraudulent ICOs before the end of 2017.
In Europe, the European Commission is exploring regulatory frameworks for fintech and blockchain technology, though comprehensive cryptocurrency regulation remains months or years away. UBS CEO Sergio Ermotti, speaking to CNBC on October 27, 2017, articulated a view shared by many in the traditional banking sector: skeptical of cryptocurrencies themselves but enthusiastic about the underlying blockchain technology. UBS has been involved in the Batavia blockchain project with IBM and several partner banks, focused on trade finance applications.
In Asia, Japan has emerged as a relative safe harbor, having implemented a licensing regime for cryptocurrency exchanges in April 2017 following the Mt. Gox collapse. South Korea is developing its own framework, while Southeast Asian jurisdictions like Singapore and Hong Kong are positioning themselves as crypto-friendly hubs.
The convergence of institutional interest — exemplified by Novogratz’s $500 million fund and the 124 existing crypto funds — and regulatory activity suggests that 2018 will be a defining year for the relationship between governments and digital assets.
Final Outlook
The cryptocurrency industry is at an inflection point. The $2.3 billion managed by crypto-focused hedge funds is minuscule compared to the $3.15 trillion held by the broader hedge fund industry, as noted by HFRI data for the third quarter. But the trajectory is unmistakable: institutional capital is flowing into digital assets, and with it comes the inevitable demand for regulatory clarity.
The most likely outcome is a form of regulated legitimacy. Governments around the world recognize that an outright ban on cryptocurrencies — as China has attempted — is difficult to enforce in a borderless, decentralized ecosystem. Instead, the path forward will likely involve registration requirements for crypto funds, disclosure standards for token offerings, and anti-money laundering rules for exchanges.
For the 124 crypto hedge funds and counting, compliance is not a threat — it is a necessity. The funds that navigate the regulatory landscape most effectively will be best positioned to capture the enormous flows of institutional capital that are beginning to find their way into digital assets. The alternative — operating in regulatory gray zones — is becoming increasingly untenable as the stakes, and the scrutiny, continue to rise.
The message from both Wall Street and Washington is clear: cryptocurrencies are here to stay, and the rules of engagement are being written in real time.
Disclaimer: This article is for informational purposes only and does not constitute legal or financial advice. Regulatory landscapes are subject to change, and readers should consult qualified professionals for guidance specific to their circumstances.
novogratz raising 500m for galaxy partners in 2017 was the original institutional signal. guy called the top and the bottom
90 funds launched in 2017 alone managing 2.3b. wonder how many of those are still around. id guess less than 15
2.3b total AUM across 120+ funds. thats like 19m per fund on average. most were probably just two guys and a tradingview account