With more than 500 cryptocurrency exchanges in the world today and about 1,500 cryptocurrencies, digital assets are truly a global market that has grabbed the attention of everyone from the retail investor to major institutions. But with a market that has literally pulled in millions of individual accounts globally, it has brought in a small percentage of traditional institutional players.
At the FIX Trading Community event in Chicago on July 18, 2018, a panel of four cryptocurrency firm executives spoke candidly about why some institutions have moved into the space and why there aren’t more banks, hedge funds, proprietary trading firms and large institutional players in the space today. What emerged is a picture of a marketplace with tremendous momentum and interest, yet a financial sector that is still young and faced with a number of infrastructure, qualitative and regulatory issues. There are also a number of challenges facing the FIX community when it comes to industry adoption of FIX technology. All of these topics were addressed by the lively panelists who see incredible potential, growth and opportunity in the space.
The institutionalization of crypto has been building up, said Hu Liang, Founder and CEO of Omniex. Obviously, the retail phenomenon over the past year certainly pushed some institutions over the cliff or got them to pay closer attention to it. Institutions realize that there is long-term intrinsic value to crypto.
The tokenization of assets, according to the panel, will happen in the coming months or years. The technological growth and advances wrought by the Internet, is pushing financial innovation into new sectors, well beyond traditional finance.
It is not going away and is here to stay, said Sean Ristau, Co-Chair Digital Currency Working Group, FIX Trading Community, Director of Exchange Integration and Education at Bcause. It is a changing style of investment.
But what is needed is critical infrastructure which includes everything from world-class exchange platforms that can handle trading at stock and futures exchange speeds. Panelists said that many of the top spot exchanges today use FIX API, but not all and not in a standardized manner across the crypto markets. The FIX Trading Community is trying to address that very issue with its Digital Currency Working Group. The Group continues to attract more members with a goal to bring a best-practices framework for FIX in the crypto space. Group leaders are working on that framework now and will present it back to the group to gather feedback. The goal then is to publish a FIX protocol guide for crypto by the end of the year.
The foundations are already there for messaging, Ristau said. It’s really applying those one-off cases to FIX.
Members of the Digital Currency Working Group are participating on the International Organization for Standardization (ISO) for the crypto space. The goal there is to determine just how the cryptocurrency industry is going to be represented in the ISO community and develop a standard similar to ISO 4217, which is the standard for representing currency codes. Jim Northey, Co-Chair Global Technical Committee and Co-Chair High Performance Working Group, FIX Trading Community, said such issues, which just two years ago were not even open for discussion, now garner interest and are being addressed. That is just one example of the development that will be required before institutions begin to integrate cryptocurrencies into their systems.
The practical challenges for the cryptocurrency sector rest largely on two major issues, the need for regulated custodians and elimination of both trading counterparty and settlement risk. Hacking thefts of well-known exchanges and so-called hot wallets around the world have cost owners billions of dollars in recent years. It also has shaken the confidence institutions have in the safety and security of these assets. Some institutions have stated that the custody services that are available do not meet many institutional requirements. But Rosario Ingargiola, Founder & CEO of OTCXN, said that has changed and will continue to improve. He argued that safe, secure, accessible and useable custody technology is available now, and meets those stringent demands. And more are coming. Well known securities custodians and banking custodians are working on their own solutions. Ingargiola stated that tokenization of assets, both fiat and crypto, on high-performance enterprise blockchain is critical in order to remove public ledger transactions from the real-time trading pipeline and make trading crypto assets scalable. Real-time pre-trade risk checks and trade matching based on provable assets digitized on ledger, make riskless atomic exchange of fiat for crypto with real-time clearing and settlement a reality. Liang noted that such industry giants may adopt blockchain technology in support of crypto, as well as traditional assets such as securities.
How would you take all of the stock certificates that DTCC is holding and digitize them onto the blockchain? asked Liang, who has been considering use cases for blockchain technology. There has to be a gateway somewhere. We called it on-off ramps of digital assets versus traditional assets. Who is most suited to do that? It’s a global custodian.
In the meantime, smaller custodial technology firms have moved into that space. But the panelists differed on how advanced this technology is today. Serg Gulko, CTO & Co-founder of XTRD said the so-called cold storage services, whereby digital assets are held off exchange with several layers of protection, may not be practical for firms actively dipping in and out of those accounts for trading purposes. Ingargiola said such technology exists today and can be used safely and efficiently by institutions.
The qualified custodial problem isn’t a technology problem, Liang said. The problem is, when you have a big asset manager, how do they put all of those assets into a company that can truly keep it safe in the eyes of the regulator? None of those exist today, and I think that is the problem.
Perhaps the largest hurdle facing the crypto market in the eyes of institutions is regulation. To date, US regulators have taken somewhat of a hands off approach to the cryptocurrency space. The US Treasury Department, Department of Justice, Securities & Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC), all have looked at various parts of these markets. SEC Chairman Jay Clayton is often quoted in the digital space for saying he hasn’t seen an ICO yet that was not a security, thus putting Initial Coin Offerings firmly under the SEC’s jurisdiction. Meanwhile, the CFTC has taken a light touch approach to crypto assets, but has labeled cryptocurrencies as commodities and therefore, under its jurisdiction. But besides a small number of cases, both agencies have been moving slowly to establish clear rules for trading these markets. Without them, panelists said that could be the number one deterrent for institutions.
The fact that they have not come out and stopped it altogether is a really great sign that they are trying to be accommodating, Liang said. Having groups like FIX behind this effort, and institutional players wanting to jump in, will help the regulator figure out how to handle all of this. How to be a broker-dealer in this space is not clear, for example.
There is no clear timeline on when the regulatory clarity will come for the market. But in the meantime, the picture painted by the panelists is that there is much in the way of infrastructure that still needs to be developed and improved. The FIX Community will be instrumental in bringing this asset class into the institutional mainstream.
Neena Dholani is Global Marketing and ProgramDirector, FIX Trading Community
