What are currently some of the key technical and business challenges facing institutions when it comes to trading and investing in cryptocurrencies?
The key technical challenge is the inability to define and evaluate blockchain security. With blockchain being the underlying “layer”, it touches on other components aside from on-chain participation, namely (1) custody, (2) transfers, (3) compliance and (4) scalability.
The biggest business challenge would be public scepticism of cryptocurrencies. Media influence plays a big role for mainstream adoption, especially for something that’s new and radical.
If crypto is still regarded as an asset class that is high risk and built for scams, wider adoption with real money institutions will prove difficult. Moreover, being a new asset class and field of investing, regulatory frameworks have little to rely on as new policies are struggling to keep up with the rapid evolution of crypto.
How does the value proposition of having some exposure to cryptocurrencies stack up for institutional trading and investment firms when compared to more mature and established markets and what factors are likely to influence their decisions about getting involved in the market?
The fundamental value proposition of crypto exposure is the utility that blockchain and crypto technology offers across many verticals, some of which include security and risk management, finance, and information technology.
Ultimately being a new and radical asset class, performance and utility is subjected to market conditions. In bull markets and periods of easy monetary policies where economies are flush with cash, investing in crypto becomes more attractive given its nature as an asset with high volatility and high beta. Moreover, greater PE/VC funding provides projects fuel to explore new opportunities to tackle business problems and create innovative solutions.
What can be done to unlock more investment potential from cryptocurrencies for institutional players?
Education. If investors viewed crypto as an innovative way to build solutions and not just as an asset class to trade, greater retail and institutional flow sprouts meaningful ecosystems.
The fundamental value proposition of crypto exposure is the utility that blockchain and crypto technology offers across many verticals
What are your thoughts about crypto derivatives and the role that various initiatives like the CESR reference rate might play in helping to encourage more institutional market participants to gain exposure to these instruments and hedge risk?
Derivatives are a natural step for an asset class that has greater adoption, allowing for new methods for investors to (1) hedge risk and (2) tactically trade and explore inefficiencies. Crypto derivatives continue to dominate trading in the market, accounting for over half of total crypto trading volume – solidifying its place. Naturally this poses risks to the investor creating artificial leverage to trade, hence ensuring proper risk management and education is vital in the sustainability of derivatives trading.
I think institutions would benchmark yields/rates against traditional references. Mainly because something like the CESR is derived from an entirely different product or method for yield. For example, it makes more sense to use CESR as a benchmark against DEFI yield.
What improvements to the microstructure of the crypto ecosystem could be made, including new types of trading platforms and venues, which would facilitate more institutional engagement with it?
Having clear regulatory and compliance standards is key. Regulatory compliances for Centralized Exchanges – ensuring that funds are handled properly. Within DeFi adoption, introduction of regulatory standards across governance, finance, technology, and other verticals. Greater transparency will encourage greater institutional adoption and bring real money into the space.
This would be the first hurdle and having clear standards would then set a foundation to what can or can’t be done.
What are your expectations about how the institutional cryptocurrency market is likely to evolve around the world over the next few years and what are the main issues that are at likely to be play here?
Given current efforts on both government and corporate level, the institutional market should grow over time. Institutional adoption continues to build as evidenced by the current number of ETF applications awaiting SEC approval, along with Tier 1 financial institutions building and offering a variety of services across trading and custody. As investors’ confidence increases, I do expect crypto to be in the discussion when it comes to asset allocation, whether it’s for a general portfolio, or for pension funds. We also expect more structured products involving crypto to be created as well.