A clear regulatory framework is crucial for further institutional adoption of crypto currency trading and the growth of this asset class, according to Jenna Wright, Managing Director, LMAX Digital.
She said that an internationally trusted marketplace for institutional-only cryptocurrency trading needs to be established and “this hinges on regulation”.
“The provision of credit or credit intermediation by global banks is taken for granted in traditional capital markets, but unfortunately it doesn’t exist in the crypto marketplace yet,” she told Traders Magazine.
Wright noted that credit provision by the banking system, which includes major global banks with large balance sheets, is essential for crystallization of cryptocurrency as an asset class.
Only when institutions can trade through a trusted central counterparty, large pension funds and asset managers will start allocating and institutions portions of their portfolio into crypto, she added.
“Across the board, we’re seeing institutions, including leading global banks, having to respond to increased demand from their customers to offer cryptocurrency products,” said Wright.
She added that customers are realizing that among all the other reasons to gain exposure to the asset class, digital assets offer the potential to dramatically reduce costs through faster and more automated processes and settlements.
“However, large, regulated institutions (in particular banks) need a clear regulatory framework to embrace this asset class,” she said.
According to Wright, institutions need to know they are operating within a compliant system with appropriate venue controls in place to ensure an orderly market.
“100% uptime is key to ensuring customers can execute their trading strategies at any time and robust technology ensures we have the capability to handle high volumes during times of extreme volatility,” she said.
Wright believes that technology plays a critical role in large-scale adoption.
“Continued investment in blockchain-based infrastructure – supported by digital assets – will result in pressure to reduce settlement times and speed up processes,” she said.
Ultimately, this means that flow will be diverted to players who can support 24/7, near-immediate settlement of payments and market transactions, she added.
According to Wright, crypto offers the opportunity to move money without a trust and across borders almost instantaneously, thanks to blockchain technology.
“In order to have the confidence to move funds in a trustless way, it is critical that technology offers the solutions at scale that make such transactions truly compelling, meaning the rewards far outweigh any risks,” she added.
When asked about the impact of DeFi on markets, institutions, and valuations, Wright said that in the simplest terms, there are efficiency gains and cost savings to be realized through decentralized finance.
DeFi helps facilitate more open markets, as well as extensive new product development opportunities, especially as the industry prepares for developments like Central Bank Digital Currencies, she explained.
At the moment, a large chunk of DeFi is happening on Ethereum (a decentralized, open-source blockchain with smart contract functionality), where larger players have not yet fully transitioned.
“We believe the impact will be significant looking further out, but at this stage, it’s too early to be able to determine the scope of any potential long-term impact,” said Wright, adding that right now, institutional adoption of crypto is still very much about bitcoin adoption.
LMAX Group is working to enhance market structure within crypto and create a regulated, controlled marketplace for institutions wanting to develop a digital assets strategy.
In partnership with SIX, LMAX Group recently announced an offering that allows customers to trade cash-settled, centrally cleared crypto futures, an important product for global banks wanting to participate in the digital asset ecosystem.
“We’re looking to provide the framework and infrastructure global banks and institutional investors need in order to enter the space,” commented Wright.
This partnership provides them with access via an established industry credit intermediation infrastructure that has already been tested and used by traditional institutions, especially banks and brokers, she added.
Right now, LMAX Digital is fully focused on creating the infrastructure to support a regulated, frictionless marketplace for crypto.
“Our goal is to ultimately create an institutional trading environment for both spot and derivative cryptocurrencies,” Wright said.
Looking ahead, Wright believes that product innovation, like their crypto futures launch, will open more market access to banks and more importantly, market access for their customers.
Wright said that digital assets are here to stay and will drive fundamental industry change based on blockchains, smart contracts creating programmable money transfers, coins and tokens, and decentralized business models.
She stressed that regulation is key to further crypto adoption so it’s good that government and industry regulators are focusing on an effective framework for crypto.
“This will encourage more onshore use, promoting competition, innovation and supporting competitiveness,” she said.
