Rudimentary infrastructure and systems slow cryptocurrency adoption

 

RUDIMENTARY INFRASTRUCTURE AND SYSTEMS SLOW CRYPTOCURRENCY ADOPTION

TIM LEEMASTER

 
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The blockchain industry is developing the beginnings of the fundamental financial infrastructure needed to attract major institutional investors but a lot more work is needed, industry executives say.

Repurchase agreements, or “repos”, custody, prime brokerage and stable trading platforms are among the many instruments that will underpin the liquidity required for larger asset managers, they said.

“It’s important to acknowledge there’s already been a lot of progress made over the last three or four years in institutionalizing the asset class; when I started in 2014 it was hard for a crypto company to get a bank account – just to get service – and still is,” said Joshua Lim, director, trading strategy Galaxy Digital Ventures.

In the US there are only two or three that are openly friendly and willing to “onboard” new crypto-related companies, he added. Galaxy invests in and provides financial services to blockchain companies.

An embryonic lending and borrowing market is developing that allows investors to short bitcoin, and important for anyone trying to become a major player to protect against potential losses, the executives pointed out. And Fidelity Investments, one of the largest asset management firms in the world, made headlines recently when it set up a cryptocurrency unit.

“There has never been more institutional investment or interest,” according to Mas Nakachi, vice president of strategy and business development at Goldman Sachs-backed Axoni, despite a huge plunge in cryptocurrency value.

The problem is getting it to stick. One bulge bracket bank Nakachi’s firm, which is developing cryptocurrency-based credit derivatives, worked with walked away because the revenue it anticipated from blockchain was just too small.  “It’s so shortsighted,” Nakachi said. “Small revenue now could be market changing in the future.”

The cryptocurrency trading market is, of course, still tiny compared to other financial markets. Beatrice O’Carroll, head of institutional sales at Circle estimated the unregulated cryptocurrency derivatives market at USD 1bn, a spot exchange market at USD 600m, a spot over the counter exchange market at USD 100m and a regulated derivatives market, the kind major institutional investors require, at USD 25m. Circle is a Boston-based mobile payments and cryptocurrency trading firm backed by Chinese bitcoin miner Bitmain.

Lim saw a larger USD 100m traded daily in regulated derivatives and USD 200m traded daily on spot exchanges available to US investors.

At the same time the industry struggles with foundation principles, forged in the depth of the 2008 financial crisis, of an asset separate and apart from the mainstream financial sector.  

“It’s a two steps forward and one step back kind of thing,” Lim said. 

The group was speaking on a panel at a recent technology forum in New York at the International Swaps and Derivatives Association.

 

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