In the last 12 months, there has been a sea change in the crypto markets with a shift from the sentiment-driven retail model and speculative trading to a more mature, long-term investment approach, as new institutional players begin allocating a portion of their investments to crypto assets, Tony Pettipiece, Chair of the Global Digital Asset & Cryptocurrency Public Policy & Regulation Committee, said.
“These more stable institutional flows have led to a broadening of the investor base, higher volumes in crypto derivatives, and a solidifying impact on liquidity, though volatility can still be high,” he told Traders Magazine.
He added that on top of broader participation by institutional players, some of the key trends in the market include a broader interest in the tokenization of different classes of assets, the growth of DeFI for alternative finance, and the surge in NFTs (Nob-Fungible Tokens).
Serge Gulko, Co-chair FIX Digital Asset Working Group, CTO, XTRD, added, that interest is shifting towards derivatives products: “Spot markets alone have become less attractive and are now accompanied by futures and options trading. There is a noticeable shift in interest of digital assets from the traditional institutions.”
Last week, the Global Digital Asset & Cryptocurrency Association (Global DCA), a global self-regulatory association for the digital asset & cryptocurrency industry, and the FIX Trading Community, a non-profit, industry-driven standards body, combined forces to further promote standardization for trading digital assets.
“The Global-DCA is working with FIX on protocol standards but also standards and guidelines that touch on the adjacent areas such as AML/KYC, Market Surveillance, Cybersecurity, Mining, as well as contributing to ongoing efforts to advance financial reporting, audit and tax accounting,” commented Pettipiece.
He said that exchanges are looking to improve their trading architectures in order to meet the more robust infrastructure required for institutional level trading, and the higher volumes and throughput speeds that the currently deployed trading protocols like RESTful APIs and WebSockets cannot support.
“FIX Protocol is the natural progression for such trading as it addresses all those performance issues, is already widely used by the global buy-side and sell-side firms, and offers ease of implementation for the exchanges,” he stressed.
The FIX Trading Community’s strategy is to build applicable standards based on many years of time-proven experience, followed by explanatory work among market participants and collaborations with organizations like the Global-DCA, according to Gulko.
“There are companies (both sell- and buy-side), that successfully utilize FIX for digital asset trading. We plan to actively involve them in the development process so they could become thought leaders. They can learn from us, we will learn from them. Additionally, with the growing interest from the institutional side, the availability or absence of FIX API support could be crucial in terms of attracting big clients,” he said.
“Stability on a certain level can and will fuel creativity in others. This is our goal – build a solid foundation for the future growth of digital asset trading,” he added.
FIX is focusing on two key initiatives to promote standardization of trading for digital assets, according to Ryan Pierce – Co-chair FIX Digital Asset Working Group.
“First, we recognize that the industry needs an authoritative source for standard instrument identifiers. This problem is made more difficult by the decentralized nature of some digital assets. To that end, FIX supported the work of ISO in creating the Digital Token Identifier standard,” he told Traders Magazine.
“Second, we are working to extend FIX to provide explicit support for digital assets. FIX was designed as a multi-asset protocol, so the changes needed are minor. We intend to publish best practice guides for buy-side, sell-side, and exchange trading of digital assets using FIX,” he added.
When asked about challenges, Pettipiece said that there are a number of challenges facing the industry and most are being addressed by the regulators and industry participants, though solutions are progressing at different speeds.
“Safe custody of assets is still a concern, though less for institutional players than for retail, as institutions lean towards more robust custodial solutions that have insurance coverage, and retail mostly relies directly on exchanges for custody, or self-custody using third-party hardware and software wallets, all of which can expose them to hacks, fraud, loss of keys, loss of assets.”
“Volatility is still high, and because the market is still relatively small and operates continuously 24 x 7, with fluctuating volumes, it is subject to sudden price moves that may hit retail investors or those who are over-leveraged the hardest,” he said.
He added that regulations are not consistent across jurisdictions, ranging from “outright bans on crypto mining or trading, to limits on using crypto derivatives, to ambiguous classification of new digital assets as a security, a commodity, a virtual currency, or other, depending on local regulations”.
“This has led to industry confusion, different enforcement rules across jurisdictions, as well as to regulatory arbitrage, where exchange and other players will leave strictly-regulated countries and setup shop in less regulated, “crypto-friendly” jurisdictions. The overall effect has been to drive many financial innovators to these offshore locations, limit global participation, and make it harder for regulators to establish anything like harmonious regulatory regimes or protect investors”, he said.
“Enforcement has been inconsistent and can be heavy handed, and in jurisdictions such as the US, it’s not clear which regulatory body has the authority, or will, to proactively monitor for and act on perceived violations, and this is further exacerbated by regime changes in DC and leadership changes at the SEC and CFTC,” he added.
Nevertheless, for Pettipiece the future of digital assets trading is looking rosier: “We expect to see increased trading flows and broader participation by different investor groups.”
“We’ll see increased clarification from the regulators, with a focus on market integrity and investor protection, all of which will stabilize the space and help create a level playing field for participants across the board,” he concluded.