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Custody Holds Back Institutional Crypto Trading
Traders Magazine Online News, September 18, 2018
The lack of trusted custody solutions is one of the main hurdles holding back institutional trading of cryptocurrencies according to consultancy GreySpark Partners.
Greyspark said in a report, Charting the growth of cryptocurrencies, that the number of crypto-hedge funds has increased significantly over the past two years but the creation of funds is slowing down, mainly due to the lack of trusted custody solutions. The consultancy expects the number of funds to reach between 160 and 180 by the end of this year, which is only 2% of the 5,500 hedge funds trading other asset classes globally.
“The market is waiting for big houses such as State Street and Northern Trust to take on this role,” added the report . “Difficulties in accessing liquidity or finding capital-efficient instruments for short or hedge positions is also an issue.”
Business Insider reported yesterday that Goldman Sachs is postponing plans to open a cryptocurrency trading desk, due to regulatory uncertainty, and the investment bank is looking to launch a custody product for the new assets instead.
William Benattar, head of fintech at GreySpark Partners, said in an email to Markets Media regarding the custody issue: “All institutions, not matter the type have one thing in common: no one is ready, no one is even near to be ready but yet, in an attempt to get the first mover advantage a few institutions are going public claiming that they are operational.”
Benattar added that traditional custodians need to follow customers and adding digital assets will become necessary to prevent clients moving to a different service provider. For exchanges, the combination of a digital assets platform and custody services makes sense as it provides customers with end-to-end services. “The trade life-cycle is fully covered (clearing, settlement and custody, in some instances fiat to crypto conversion is also supported),” he added.
Exchanges
For example, Deutsche Börse has formed a distributed ledger technology, crypto assets and new market structures unit as it expects the digital economy to be more decentralised. Jens Hachmeister, head of the new Deutsche Börse team, said in an interview on the German exchange’s website that new technologies could potentially cut across the entire value chain from initial pubic offerings to settlement and custody.
Another German exchange operator, Boerse Stuttgart Group, is aiming to create an end-to-end infrastructure for digital assets. Switzerland’s stock exchange – owned and managed by SIX – is also building a fully integrated trading, settlement and custody infrastructure for digital assets.
In the US, Intercontinental Exchange has launched Bakkt, a new company which will use Microsoft cloud solutions to create an open and regulated global ecosystem for digital assets. The Bakkt ecosystem is slated to include federally regulated markets and warehousing along with merchant and consumer applications in the digital asset marketplace, which it estimates at $270bn (€232bn).
Benattar said: “Bakkt is a game-changer. It shows how investment in digital assets can be institutionalised and paves the way for large financial institutions to join in. The message is that bitcoin (and cryptocurrencies) credit cards and bitcoin to your pension fund is not so far off.”
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