The majority of institutional investors continue to believe cryptocurrency will have a place in the future although regulators need to develop a framework for an institutional market.
Consultancy Greenwich Associates said in a survey, The Institutionalization of Cryptocurrency, that more than 70% of institutional investors believe crypto will have a place in the future, compared to 17% who think it is going away. They have not lost interest despite this year’s price drop, with the overall market down over 70% from its peak.
Richard Johnson, vice president in the market structure and technology practice at Greenwich, said in the report that although there is interest, the existing crypto market structure in not amenable for traditional institutional investors.
“Recognizing this, established market participants and emerging players are focusing product development efforts on the institutional market,” Johnson added. “The question then becomes whether an institutional version of crypto, with trusted third-party intermediaries, can continue to live up to the original promise of decentralization and disruption.”
For example, Citi last week said that it will launch a crypto custody solutions to institutional investors through a digital asset receipt. Business Insider reported that the DAR will be similar to an American depositary receipt, which allows overseas equities to trade on American exchanges just like a US share. The foreign stock is held by a custodian bank, which issues the ADR.
The Greenwich report said regulatory clarity is already beginning to emerge and avenues are being pursued to make crypto even more appealing to the institutional community.
Securitizations track the price of the underlying cryptoasset, while having a similar structure to existing assets, making it easy for institutions to gain exposure. In addition some exchanges, including Bakkt, the ICE spin-off, have announced plans to focus on providing custody.
Selim Fendi, chief executive of USAVE Blockchain, which guarantees a secure and traceable origin of eco-friendly and ethical gold using blockchain technology, said : “One factor that will minimise or help growth of the crypto market are the regulators.”
He spoke on a panel at a workshop held by the Association of Futures Markets and GMEX Group, the exchange technology provider, in London yesterday.
Fendi continued that fulfilling the know your customer and anti-money laundering requirements are a challenge in the nascent market.
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Hirander Misra, chairman and chief executive of GMEX Group, said on the panel that his firm has received requests to provide technology for digital assets from traditional exchanges .
“They have suddenly woken up to the real potential,” he added. “They have the opportunity to unlock liquidity as they have existing ecosystems.”
Misra continued that in a decentralized system, smart exchanges will become nodes on a network and be able to directly interact with one another, which will remove the need for a number of intermediaries. However he said custody solutions and deeper benchmarks are needed to create trust.
“Sooner or later an interdealer broker will take the bull by the horns and become a bridge between traditional and digital assets,” added Misra.
GMEX is a firm believer in the growth of asset-backed tokens over the longer term and regulators will allow the pie to become bigger.
Sean Kiernan, chief executive of DAG Global, which provides traditional banking services and solutions for digital asset businesses, agreed that security tokens will be a long-term growth area.
Kiernan said: “Traditional equity will become security tokens due to scaleability, cost and increased efficiency.”
He continued that institutional traders are staying away from digital assets because they are worried about reputational damage. However Kiernan believes that regulators will develop governance frameworks and standards over time which will satisfy institutional trading.
“In three to five years lots of small firms will be acquired by bigger firms or bigger firms will enter the market themselves,” added Kiernan.
All exchanges will have integrated digital assets in ten years time according to Dmitry Kaminskiy, managing partner of Deep Knowledge Ventures, a Hong Kong-based investment fund focused on deep technology and advanced science projects.