For over a decade now, we have seen the growth and development of digital assets. Some have been highly successful in terms of increasing their value and use (for example Bitcoin and Ethereum) whilst many have been less successful.
What is clear is the lack of institutional capital, compared to other tradable assets, that has entered the digital assets market during this period. In turn, what has really held back the considerable growth of these assets has been the lack of transparency and a disjointed market.
Some crypto purists will argue that these decentralised assets were never designed to be commercialised, but the reality is that they are beginning to develop to be just that. The growth and harmonisation of these products remain inconsistent. Regulators and governments have struggled to come to terms with the products and this has held back institutions from fully adopting these products. Without institutional adoption, digital assets will never be truly mainstream nor fully accepted by policymakers and regulators and will not achieve wider retail participation.
There is no right or wrong position, everyone has an agenda, and this will continue to be the case. It is most likely that in this market, the demand for the established “benchmark” assets such as Bitcoin and Ethereum will remain strong. The demand for these assets has mainly come from the retail market over the years and crypto platforms (such as Coinbase and Binance) have created technology to service these markets along with participation from some professional trading firms. Yet there is still no single fully regulated member-based exchange that can service spot cryptocurrency trading, with a fully regulated settlement and clearing system.
Major exchange groups such as ICE (owner and operator of the New York Stock Exchange) and the CME Group have enabled Bitcoin Futures trading and clearing for institutional firms that wish to trade through an exchange member (e.g. Bank or Broker), but trading volumes have been unimpressive in comparison to activities in other markets.
Although participation is growing, there currently appears to be little interest from corporations and other institutions to transact in digital assets (for their clients or to simplify international payment transactions across borders). If required, these groups have had to turn to less regulated platforms which usually only have partial insurance cover on the value of their assets and give little proactive service and support from the platforms that allow the transactions. In addition to this, the regulatory fears of “not getting it right” can make matters more complicated.
This is made worse where Crypto Platforms have relocated away from credible regulated financial centres (such as Deribit moving from Amsterdam to Panama) or platforms being opaque about where they are headquartered (such as Binance). All of this has created an “own goal” and has raised significant barriers to entry for institutional adopters. This in turn has suppressed the use and value of digital markets and has prevented these assets from becoming truly mainstream. These unhelpful behaviours create a lack of trust and a lack of strong corporate governance; everything an organisation does not want when placing capital in the hands of another organisation.
The security improvements typical in mainstreamed products are also desperately needed in the current market before more money will come into the digital asset space. Starting with Mt.Gox in 2011 to KuCoin in 2020, hacking and theft of digital assets is on the rise. These issues keep the industry held back as all centrally based crypto platforms are honey pots for cybercriminals and every effort needs to be made to increase the security of their infrastructures.
After an initial market consultation, the UK market regulator (the FCA) brought in new legislation known as the Crypto Assets Registration. This states that as of 10 January 2021 all UK crypto asset businesses operating in this sector must be registered with the FCA. In addition to this, the use of Crypto “Derivatives” will also be banned for retail participants. This ban will also include regulated Exchange Traded Notes (ETNs) linked to crypto assets for retail customers (such as CoinShares Bitcoin Tracker One, listed on Nasdaq Nordic). This blanket ban could now result in more investors trading on unregulated venues without market abuse protection as opposed to a regulated product on a major Stock Exchange.
These are just some of the examples of why large-scale institutional money has not entered the market yet. It is frustrating that the platform operators are not working in parallel with one another; they should seek to work closely together along with the regulators to assist with creating an environment which benefits all participants and not just the crypto platform stakeholders. This is what happens with Stock Exchanges around the world. They may be in competition with one another in areas such as primary company listings, but they constantly discuss and assist each other on procedures, governance and improvements in order to protect the markets, the members, and the participants.
At Appold many of the institutional and corporate engagements we have held have highlighted one strong point. That is “Who can fully support our organization in digital asset trading, settlement and custody?” It’s a simple question with a very long and complicated set of answers to each part based on the objectives and requirements of the organisation in question.
- Do they just want a frontend execution platform with training and support or a fully integrated front-to-backend trading and clearing system with built-in risk and compliance functions?
- Do they only want to trade on a single venue or have the best of book bid/offer across multiple venues? Or maybe they are content for some large order size to be worked through the OTC market as block trades
- Will they only trade on a venue that has 100% insurance cover (without limit caps) with all balances stored in cold wallets only on an intraday basis with transactions occurring once a day?
- What needs to be done by firms to trade these markets in an approved manner with their local regulator and not risk regulatory fines in the future?
- Can they offer their clients direct market access with a “white label” solution trading platform under their own brand with integrated AML and KYC compliant processes?
- Can they receive market structure and new product updates along with market research to educate both clients and in-house teams?
The list is long but there are answers and solutions to maximise best practice and manage risk.
For that reason, we created and launched the AppoldLink product. The objective is to deliver a full-service digital asset offering based on the needs of organisations seeking to enter the digital assets market. Appold is an independent, privately own company and is not tied to any firm in the digital space. We have strong relationships in the industry and look at the full spectrum of solutions when assisting clients in what would work best for them and their clients. We position ourselves as a “one-stop solution provider for digital assets” and advise on all matters, large or small.
Further information can be found on our website (www.appold.com) or contact us directly to discuss your requirements in more detail.
Rob Gaskell, Founder and Partner of Appold