In the cryptocurrency and blockchain landscape, one term that has gained increased prominence is “institutional.” The transition from retail to institutional adoption began to take shape around 2017, notably at the Consensus Conference in New York. Visionaries like Abby Johnson of Fidelity and David Rutter of R3 took centre stage, signalling a shift in the industry’s focus towards institutional involvement.
However, it’s important to recognise that meeting institutional needs requires a comprehensive overhaul, spanning product development, technology, governance, risk management, and compliance. Crucially, institutions entrust their reputation to the crypto ecosystem, underscoring the need for responsible and robust infrastructure.
Crypto Market Cap vs. Institutional Markets
If we examine the cryptocurrency market cap, it appears to be minor when compared to traditional institutional markets. The overall crypto market capitalisation is currently around $1.06 trillion. Of the top five tokens, Bitcoin (BTC) and Ethereum (ETH), account for 80 percent of this value.
In contrast, the global foreign exchange (FX) market is valued at $753 billion, the equities market at $108.6 trillion, bonds at $133 trillion, and derivatives at an estimated $1 quadrillion. At first glance, it seems that institutions have not fully embraced cryptocurrencies, but a closer inspection shows a more nuanced perspective.
Usage patterns and allocation of assets play a pivotal role in institutional engagement with the crypto market. Names like Brevan Howard, Jump Capital, and DRW Cumberland from the traditional financial sector have been actively involved in crypto trading for years.
The extent of their participation hinges on various factors, including market size, the nature of tokens, and risk and governance considerations. Challenges such as trading on unregulated platforms, lack of regulated custody services, and technical capabilities of trading venues need to be addressed to attract more institutional investors.
Blockchain technology itself holds immense promise for traditional financial institutions. It has the potential to streamline processes, reduce inefficiencies, eliminate duplication, and expedite settlements. Major players like JPMorgan, Bank of America Merrill Lynch, Fnality, the Bank for International Settlements (BIS), SIX Group, and Swift have recognised the benefits of blockchain and have actively pursued its integration into their operations.
Tokens have also emerged as a viable fundraising medium, allowing startups to access global capital quickly and efficiently. Despite early issues with initial coin offerings (ICOs) and initial exchange offerings (IEOs), these fundraising methods demonstrated the potential of blockchain to facilitate global financing.
Financial institutions have viewed this as an experiment that can deliver significant efficiencies and cost savings, as exemplified by Citibank’s recent blockchain-powered platform announcement and the work that enterprise blockchain pioneers such as Kaleido are currently undertaking.
To propel the industry forward, several key steps are essential:
Asset Tokenization: Transforming ownership structures into smart contracts can make ownership more transparent and cost-effective, potentially reducing the need for central securities depositories (CSDs). Startups should consider this path alongside traditional venture capital and private equity routes.
Infrastructure Needs: To facilitate broader adoption, the crypto space requires robust custodians, legal frameworks, regulations, and educational efforts. Ensuring the privacy of ownership is also paramount.
Benefits for All: Blockchain-driven tokenization can offer global reach, cheaper fundraising, and enhanced resiliency. This groundwork will naturally give rise to products that appeal to a broader audience, compared to the early days of ICOs where projects rushed to go public on exchanges.
When these assets are ready for public trading, several key factors come into play:
Regulated Infrastructure: A decentralised perspective on regulation, encompassing custodians, trading venues, brokers, clearing agents, and settlement agents, is essential to ensure a secure and compliant environment.
Evolution of Business Models: Institutions must transition from moving assets to exchanges for trading. Segregating roles can enhance governance and participation while reducing systemic risk.
Collaborative Efforts: Like SWIFT in the 1980s, Binance, with its substantial market presence, is uniquely positioned to drive standards in connectivity, interoperability, and regulation, fostering growth and cooperation across the crypto industry.
Blockchain’s Impact on Market Efficiency: Empower custodians and other market participants to securely hold assets by leveraging the transparency of blockchain. This facilitates trading on the exchange, allowing the exchange to concentrate on its core strengths – trading and earning revenue from trading-related fees. Custodians and other entities can respond to requests for quotes, offering third-party validation that both buyers and sellers possess the necessary assets or funds and are conducting transactions correctly. This separation of roles ensures compliance with existing governance standards for funds, family offices, and banks, ultimately encouraging broader participation in the market.
The path to embracing the crypto evolution lies in a fundamental transformation of the ecosystem to meet institutional needs. As we move forward, responsible development, robust infrastructure, and collaborative efforts will be key in ushering in a future where tokenized assets and blockchain technology play a central role in global finance. The crypto evolution is underway, and institutions are poised to play a significant part in shaping its future.
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