The past few years have proved to be a bit of a crypto learning curve for all parties involved – whether a project, investor, practitioner, developer, or anything in between, the industry became a hodgepodge of new types of offerings (ie STOs, stable coins), new use-cases, a volatile market and global regulations/regional crackdowns that were anything but uniform.
We just couldn’t figure out how to adopt this new asset class and the powerful technology that promised a new world order of digital currency and mass decentralised disruption. In fact, in 2018, the majority of the crypto market saw losses of up to 95%.
Today, we are smarter, more experienced and more focused on the task at hand: ensure the participation of institutional investors in order to preserve the overall health of the market.
While we welcomed the flood of retail investors jump-starting the crypto market with the onset of Bitcoin, we need institutions to create liquidity and enable the market to thrive on a consistent basis. With an industry as nascent as cryptocurrency, the dependency on retail investors is rather dangerous since a bit of fear-mongering based on Twitter/Reddit-fuelled rumours can have the power to tank the entire market.
Addressing counterparty and settlement
A lot of the trepidation around institutions is about ensuring the security of their assets. Let’s look at a few providers who promise to solve this issue and pave the way for a safe, legitimised market ready for prime time trading, in 2019…
One of the trailblazers for solving counterparty and settlement risk for investors was OTCXN, which announced global liquidity services late last year, thereby eliminating the need for intermediaries in trading. Since launching, they have added a number of trading entities and exchanges onto their platform and even on-boarded Kingdom Trust and Prime Trust as custodians on their network. The third-party custodians allowed them to enter the space in a major way as they facilitated the clearing and settlement of OTC block trades and cross-exchange trading.
They’re not the only ones who are competing to create an optimal trading environment for hedge funds, pension funds, and the like. Most recently, OTC specialist Genesis Global Trading teamed up with BitGo, a cryptocurrency custodian, to also address counterparty and settlement risk associated with OTC trading with a caveat of no cold storage time lags. The client exclusively operates between BitGo and Genesis, which means traded coins are never exposed to hot wallets and public blockchains.
But the competition remains fierce as one of BitGo’s rivals, Gemini has one of the most secure exchanges on the market, which undoubtedly appeals to institutions. They launched an exchange with custodial infrastructure in 2014 and hope to foster Wall Street engagement with regulatory compliance. In 2016, Gemini became the world’s first licensed Ether exchange. Gemini’s exchange offers crypto to fiat payments as well as BTC/ETH and is used for the CBOE Bitcoin future settlement.
Among other well-known advocates, the Winklevoss brothers firmly believe that stable coins show great promise in the broader crypto markets in terms of development and usage.
Other heavy-hitters in the space include venerable institutions like Fidelity and the New York Stock Exchange parent ICE Group’s futures platform Bakkt.
Fidelity Digital Assets (FDAS) launched a trading platform for institutional investors focusing on custody of assets and price discovery. They are safekeeping Bitcoin and Ether (with future plans to evaluate the other top five to seven coins) on behalf of their clients, matching their buy and sell offers with a range of liquidity providers and exchanges. FDAS is essentially providing a best-price experience, bypassing the exchanges. Eventually, they plan to custody tokenised assets.
Perhaps one of the most newsworthy players ready to tackle this market is Bakkt, partly due to the whopping $182.5M they raised to fund their endeavor. Bakkt aims to create a fully-federally regulated exchange for trading and warehousing bitcoin to minimise huge price fluctuations and ultimately achieve a highly-liquid commercial currency.
While the exchange launch is delayed until January 24, their secondary goal to transform the retail payment system is underway. They purchased the back office of Rosenthal Collins Group (RCG) – a futures commissions merchant – which includes compliance and treasury services, and risk management. This should help the customer business, streamlining payments. They are partnering with Starbucks to create a digital app that allows consumers to pre-pay a card with Bitcoin.
In an interesting development, Vontobel, a major private Swiss bank, is offering regulated cryptocurrency custody services to institutional clients. The newly-launched crypto custody solution is named “Digital Asset Vault” and complies with the standards set by industry regulators and financial intermediaries. They are the only bank to offer themselves as a custodian for digital assets.
While this is quite the impressive list, these aren’t the only large players who are making strides to create institutional-level access in the space. They are joined by Coinbase, Binance and Nasdaq and the London Stock Exchange.
Others are even creating add-on tools for institutions to properly record their crypto transactions in the long-term.
Interchange is a software platform for institutional investors to easily perform portfolio accounting and reporting for crypto trading. It has developed from a recent merger between CoinVantage, the subsidiary of accounting firm, MG Stover, and Picks & Shovels, which provides tools for crypto investors.
The final word…
2019 has a lot to process but one thing is clear – major players, and even global banks, are doing everything in their power to work with digital assets in a safe and secure way. We can’t risk the mistakes of the past, where millions of assets were lost to a hacked exchange. With so many reputable players providing custody, settlement, and best-price service, it is only a matter of time before major banks, hedge funds, family offices, and other institutions get skin in the name and ignite the broader market.
Stewie Zhu, Founder and CEO of Distributed Credit Chain