What factors are the driving force behind the integration of crypto into traditional financial markets?
The asset class itself has been maturing. When it first started, the returns and diversification capabilities were there, but it was a new asset, and there was very little information that institutional traders could go by. Now, the assets are more mature, so institutional investors – who require a lot of analytics before they move into an asset class – are able to start considering crypto.
There is also a lot of competitive pressure on retail banks to start providing crypto services to their underlying clients. In addition, the asset managers who were looking at allocating to this asset class now have the data to run the analytics and models needed to see how crypto would impact their portfolio. A few corporates are also starting to open up their services and looking to enable payments in crypto and stablecoin. The environment is developing, and real use cases have started to emerge, hence why we’re seeing more of a push towards cryptocurrencies.
Will crypto trading soon be viewed similarly to FX when it comes to market structure?
From an institutional perspective, a lot of our clients have housed this activity close to their FX desk. When we talk with our client segment across treasuries, banks and asset managers, there is an indication that the asset class – at least from a market structure perspective – is viewed in a similar way to the FX market.
The FX market is generally an OTC market, with highly fragmented liquidity, and is more volatile than other assets. As is the cryptocurrency market. As a result, we see digital asset activity being housed mainly with the FX desks and firms prefer using these existing rails for crypto trading. It’s not a one-to-one copy, as cryptocurrencies live in an on-chain world, but it has the same components.
What are the main challenges when it comes to integrating crypto with existing FX workflows and settlement processes?
From a trading perspective, digital assets have similarities to previous FX processes, wherein activity happens either on OTC desks or crypto exchanges. To reach liquidity, there are multiple locations to go to. Connectivity to crypto liquidity destinations is hard to manage given the number of required destinations and the lack of standardisation, even when an API exists.
Moreover, crypto trades 24/7 versus FX which trades 24/5, thus implementing digital assets requires different support models and technical capabilities that function around the clock. Post-trade models also differ. In FX, a large part of activity settles through payment-versus-payment, removing settlement risk, however similar structures do not exist for crypto today and crypto settlement remains bilateral and generally prefunded. The next phase of market evolution also involves using settlement agents to enable delivery-versus-payment and reduce post-trade friction.
It’s important to note that many institutional clients still lack relationships with digital asset liquidity providers. Despite this, as the ecosystem matures these participants will likely become more widely known and obtain the required licenses required by institutional clients, to drive forward the adoption of cryptocurrencies.