Trading Reimagined is a content series that examines how the transformative power of technology is prompting a reimagining of the markets. Trading Reimagined is sponsored by Exegy.
Traditional finance is working with crypto-native firms to develop the ecosystem for tokenization, which has moved beyond a theoretical compact.
Markus Infanger, senior vice president at RippleX Growth, a business unit supporting partnerships and developer growth around the XRP ledger, said tokenization has moved from being a theoretical concept a year ago to becoming real and executable.
“There has been a lot happening in traditional finance to move the needle as firms have recognized the value of tokenization and are co-building regulatory compliant pipes and plumbing,” he added. “We need tradFi and crypto-native firms to work together across the value chain.”
For example, Zodia Custody, which is owned by Standard Chartered, Northern Trust and SBI said that it is integrating with digital asset custodians Fireblocks and Metaco. As part of the Fireblocks Network, institutional investors can transfer digital assets securely across all their accounts.
James Harris, chief commercial officer of Zodia Custody, said in a statement: “Connectivity is key in digital assets. Advancing and strengthening networks such as these are key for the future of this market.”
Infanger spoke on a panel at the Financial Times’ Crypto and Digital Assets Summit on 5 December in London. He said the biggest opportunity for tokenization is in markets which have a lot of friction due to operational inefficiencies and manual processes such as private equity or real estate.
Staci Warden, chief executive of Algorand Foundation, which has developed the Algorand blockchain technology, highlighted on the panel that tokenisation allows clearing to become settlement because value and information is transferred at the same time, so collateral does not need to be posted.
“The promised land looks great and the question is how to get there,” she added.
Warden compared the banking system to crochet as it looks beautiful on one side but the other said is a mess, so everyone needs to move at the same time
In addition to reducing friction and costs, Warden highlighted that tokenization can build markets that have never previously existed. She gave the example of an airline in Argentina which sells its tickets as non-fungible tokens (NFTs), and a secondary trading market has developed.
Market making in crypto
Andrei Kazantsev, global head of crypto trading at Goldman Sachs and Jiahua Xu, head of science, DLT Science Foundation and associate professor at UCL discussed the difference between market makers in traditional finance and crypto on a panel at the FT summit.
Kazantsev described Goldman Sachs as acting as a market maker on a principal basis from its own balance sheet and offering a two-way price in all market conditions in order to stabilise markets during times of stress, which requires extensive risk management. In contrast, Xu described the process on decentralised crypto-native exchanges where an algorithm decides on the exchange rate between two assets and ‘market makers’ are retail liquidity providers who earn yield, but many do not understand the risks.
Kasantsev continued that institutions are looking at blockchain technology. Goldman Sachs had a team of more than 50 people related to the crypto sector. The bank believes that issuing financial instruments on-chain will increase operational efficiency and that the bank’s global markets business invests in companies that it believes will transform capital markets.
“Blockchain can also improve capital efficiency, particularly through the use of intra-day repos,” Kazantsev added. “Even if we save a few basis points a year that has a huge financial impact.”
In addition, Goldman Sachs offers long-term existing clients access to the crypto sector through cash-settled crypto derivatives but not underlying spot markets. In the first half of this year trading volumes decreased in lime with the market but Kazantsev said that they increased healthily following BlackRock filing for a cash Bitcoin exchange-traded fund.
Hedge funds were also initially comfortable using crypto exchanges but in the last 18 months they have shifted to wanting to deal with counterparties who they know according to Kazantsev.
“There has been an influx into regulated exchange-traded derivatives and bitcoin futures ETFs have reached record assets under management this month,” he added.
