Institutions have arrived in crypto trading but it will take time to develop a diverse array of market participants and execution protocols.
Duncan Trenholme, global co-head of digital assets at TP ICAP, said at a media briefing: “The wholesale market in crypto is just starting. Institutions are here and offsetting risk in larger size.”
TP ICAP hosted a roundtable to discuss digital assets in London on 1 May 2024. Fusion Digital Assets, TP ICAP’s institutional regulated venue for spot crypto assets, competed its first trade in 2023, The venue follows the institutional model in traditional finance (TradFi) with independent and segregated custody, initially provided by Fidelity Digital Assets.
Manuel Nordeste, vice president at Fidelity Digital Assets, said at the roundtable that the asset manager operates 24/7 in crypto markets, which can be challenging for TradFi.
“You need to be able to provide client service on demand,” Nordeste added. “Crypto liquidity is lower at weekends and overnight, but high volatility events can happen during these times.”
Nordeste continued that Fidelity Digital Assets can facilitate multiple settlements during a day, which helps overcome the lack of access to capital in crypto markets by allowing credit line to be recycled.
Thomas Restout, group chief executive at B2C2, said the institutional digital asset liquidity provider can settle at T+5 minutes, or 5 minutes after a trade. He highlighted that the US cutting settlement from two days after a trade, T+2, to T+1 in traditional securities markets has done the heavy lifting in terms of showing the need for accelerated times.
“There is a clash between crypto that settles continuously and current TradFi systems and that is an enormous lift,” Restout added.
Restout also highlighted the lack of standardized access to crypto venues and that time that will be needed to create the equivalent of the NBBO, the National Best Bid and Offer, in equities which is used as a reference for best execution.
In addition, Restout noted that in crypto there are more exchanges than market makers and liquidity providers. In contrast in foreign exchange, which is nearly a 24-hour market, there are only four or five major exchanges.
Trenholme said: “ Fusion Digital Assets aims to become a major exchange for the wholesale market but this will take several years to build. The number of TradFi clients in crypto needs to grow, and there need to be more variety of market participants and execution protocols.”
There are still questions over whether the crypto market will develop clearinghouses and prime brokers, as in tradfi. In February this year FalconX, the institutional digital asset prime broker and the first CFTC registered swap dealer, announced a strategic partnership with Fusion Digital Assets. Austin Reid, global head of revenue and business at FalconX, said in a statement that the collaboration is another significant step in efforts to bridge traditional financial markets and the growing crypto asset ecosystem.
However, the development of institutions such as clearing houses in crypto will increase settlement costs.
“Digital asset settlement needs to be cheaper than TradFi and capital needs to move more quickly, then other asset classes will migrate,” said Trenholme.
