From Complexity to Connectivity: Simplifying institutional digital asset trading

Digital assets trading remains operationally complex for institutional market participants despite rapid advances in technology and market infrastructure.

According to Chris Knight, managing director, LMAX Digital, the infrastructure has advanced only in silos rather than holistically. Consequently, the market structure is below the expectations of most institutional participants. 

“Institutions expect standardised workflows across execution, clearing, settlement and reporting, but digital assets still require multiple venue connections, custody models and regulatory interpretations,” says Knight. “The technology is there. The challenge is making it fit the operating model institutions already use.”

Post-trade barriers

Post-trade remains the main barrier. “Execution access has improved, but custody, collateral movement, settlement and reporting still create friction. Institutions do not want more manual processes or bespoke integrations. They want digital asset trading to plug into the controls, credit and workflows they already trust.”

Liquidity fragmentation is another issue, but, says Knight, simply aggregating more venues only treats the symptom rather than solving the underlying problem. “From our perspective, the better answer is convergence: fewer connections, deeper pools and a workflow where FX and digital assets can sit on the same institutional infrastructure. Institutions do not want to manage more plumbing. They want digital assets to feel operationally as familiar as trading a currency pair.”

Clearly there is a role for technology providers to play in terms of making institutions more comfortable in the digital assets market – be that streamlining execution workflows, improving connectivity and reducing operational overheads. 

“The best technology providers are reducing complexity, not adding more layers,” says Knight. “Standardised APIs, FIX connectivity, automation and integrated execution tools help institutions access digital assets through familiar workflows. Adoption accelerates when firms can use existing governance, risk and compliance processes rather than build an entirely separate stack.”

Interoperability between the current market infrastructure and emerging digital assets ecosystems is also going to be critical, notes Knight. “Institutions are not going to rip out existing systems. They will extend them. The winners will be the firms that connect traditional market infrastructure with digital asset rails in a way that preserves institutional controls while improving liquidity, settlement and capital efficiency.”

The core components for supporting institutional-scale digital asset trading are familiar, says Knight: resilient execution, institutional custody, transparent market data, robust post-trade processing, integrated compliance and real-time risk management. “The differentiator is whether those pieces work together at scale. Institutional clients need one coherent trading environment, not another set of disconnected tools.”

The real efficiency gains though are in processes such as custody, collateral management and settlement, says Knight. “Risk now moves in real-time, but collateral often does not. That mismatch amplifies stress in volatile markets. Better custody, off-exchange collateral and faster settlement reduce the need to pre-fund every venue and allow capital to move when it is actually needed. Volatility is inevitable. Friction is optional.”

Advances in automation, data analytics and artificial intelligence are also helping firms simplify execution, enhance decision-making and strengthen risk controls, says Knight. “Automation removes manual breaks in the trading lifecycle, while better data improves visibility into liquidity, execution quality and risk. AI will increasingly support surveillance, anomaly detection and operational monitoring, but in institutional markets it has to sit inside strong governance and human oversight.”

Tokenisation and on-chain settlement are two further developments that address a basic market inefficiency, says Knight. “Capital is still too often trapped in settlement cycles. If ownership and money can move at the same speed as risk, collateral becomes more useful and markets become more efficient. Stablecoins are important here not as a crypto product, but as programmable settlement infrastructure that lets digital assets settle against digital cash.”

For many institutions, says Knight, the question is no longer whether digital assets are relevant, but how to use them at scale. “The remaining challenges are practical: clearer regulation, stronger interoperability with traditional infrastructure, better credit intermediation and post-trade services that match institutional standards. Once those pieces are in place, digital assets become another part of the capital markets toolkit.”

CONNECTING THE TRADING LIFECYCLE

According to Adam Sporn, head of prime brokerage and institutional sales at BitGo, the digital asset infrastructure company, the technology has moved quickly, but the operating model has not caught up. “Institutions still have to navigate multiple venues, custody arrangements, funding models and reporting systems, often with significant manual coordination between them.”

The biggest friction in the trading lifecycle tends to occur between systems rather than within any one part of the trade, says Sporn. “Onboarding is often repeated across providers, liquidity is spread across multiple venues, and assets may need to be moved or prefunded before execution. Post-trade reconciliation and reporting can also remain more manual than institutions are used to in traditional markets. While significant strides are being made to make digital asset prime brokerage more closely resemble traditional markets, greater integration is still needed across the trade lifecycle.”

Liquidity fragmentation across exchanges, OTC venues and digital assets ecosystems continues to be a meaningful issue, says Sporn. “Pricing, depth, and asset availability can vary significantly across exchanges, OTC desks, and blockchain ecosystems. Institutions are increasingly looking for aggregated access, smart routing and off-exchange settlement so they can reach liquidity without concentrating assets or risk in a single venue.”

Technology providers are investing in products and services designed to solve some of these issues, from enabling off-exchange to streamlining execution, says Sporn. “The most useful providers are connecting execution, custody, settlement, collateral, and reporting rather than treating them as separate activities. Better APIs and automated workflows can reduce manual transfers, duplicate processes and reconciliation breaks. The goal is not another dashboard; it is fewer handoffs and a clearer view of risk across the full trade lifecycle.”

Equally important to accelerating institutional participation in digital assets is interoperability between traditional financial market infrastructure and emerging digital asset ecosystems. “It is critical,” says Sporn. “I believe most institutions are not going to rebuild their treasury, accounting, compliance, and risk systems simply to participate in digital asset markets. The infrastructure has to connect with existing financial systems while also supporting blockchain-based assets and settlement. Adoption becomes much easier when firms can operate across both environments without creating an entirely separate control framework.”

“As tokenization expands, interoperability between traditional financial infrastructure and digital asset ecosystems is becoming increasingly important,” says Sporn. 

There are certain core components that are critical to supporting institutional-scale digital asset trading. “Secure custody, reliable liquidity access, controlled execution, settlement, collateral management, real-time risk monitoring, and complete reporting are all essential,” says Sporn. “More importantly, those components need to work together. Institutional scale depends as much on resilience, governance, and segregation of duties as it does on execution speed or market access.”

Custody, collateral management and settlement are also central to reducing both operational risk and unnecessary use of capital, says Sporn. “Institutions should not have to move assets onto a trading venue simply to access liquidity. Structures that allow assets to remain within appropriately regulated custody arrangements while supporting trading and settlement obligations can reduce counterparty exposure, limit asset movement, and improve collateral efficiency.”

And what of advances in automation, data analytics and AI? According to Sporn, automation is already helping with routing, reconciliation, exception management, and intraday risk monitoring. Better analytics can give firms a clearer view of liquidity, pricing, and counterparty exposure across venues. “AI may add value in areas like anomaly detection and operational surveillance, but it needs to be deployed with clear governance, human oversight, and appropriate controls,” says Sporn. 

The developments in tokenised assets, digital money and on-chain settlement have the potential to address long-standing market inefficiencies – reducing reconciliation, improving collateral mobility says Sporn. “The greatest benefit comes when the asset and payment legs can move through connected infrastructure with clear legal and operational certainty.”

However, tokenisation alone does not solve market structure issues; it has to be supported by reliable cash settlement, strong controls, and interoperability with existing systems. In addition, greater consistency is still needed around regulatory treatment, custody, capital requirements, market oversight, reporting, and cross-border activity, says Sporn. “The industry also has more work to do on resilience, cybersecurity, interoperability, and settlement certainty. Broader institutional adoption will depend on whether institutions can access digital asset markets with the same confidence, transparency, and control they expect in established financial markets.”

Increased complexity

Sometimes there are unintended consequences from advances in technology. “If anything, better technology has only increased complexity in digital assets,” says Andy Flury, founder and president of Wyden, a Switzerland-based provider of digital assets trading technology. “Every new venue, custodian, or settlement rail adds another integration, data format, and reconciliation point, without the standardization traditional markets built through centralized clearing and dominant venues. Institutions still have to risk-check, reconcile, and report to the same standard as any other asset class, so the challenge is most often integration. Institutions are bolting an immature, fragmented market structure onto systems and compliance frameworks built for a mature one.”

Liquidity fragmentation is one of the most underappreciated frictions in this market, says Flury. “With no consolidated tape and no dominant venue, liquidity for the same instrument splits across dozens of exchanges, OTC desks, and brokers. In trading, this shows up as wider spreads, more slippage, and inconsistent execution quality. 

“In this environment, some institutions prefer to limit their market exposure, working with a single outsourced broker. However, while this approach may offer some surface-level risk mitigation, it limits control and access to trading revenues. Under regulations like the EU’s Digital and Operational Resilience Act (DORA), it also creates compliance risks by concentrating operations into a single provider,” says Flury. 

As a result, many institutions are now looking for more sophisticated ways to access digital asset markets. “Smart order routing built across venues, rather than venue-by-venue, lets institutions pursue best execution without independently integrating and maintaining connectivity to each source. This turns fragmented liquidity into something that’s usable at any scale.”

From Wyden’s perspective, the biggest shift is away from point-to-point integration toward a unified operating layer sitting between institutions and the venues, custodians, and data providers they need, says Flury. “That removes much of the engineering overhead that used to be a prerequisite for launching digital asset services without outsourcing to a provider. Automation across the trade lifecycle cuts the manual handoffs that once required dedicated operations headcount to handle all pre-trade risk and treasury controls, and post-trade settlement and reconciliation. And because much of this is now delivered as SaaS, firms can scale trading activity without scaling their operational footprint in lockstep.”

Interoperability between traditional and emerging market infrastructure is arguably the deciding factor in institutional participation in digital assets trading, says Flury. “From an operational standpoint, institutions can’t justify running digital assets as a parallel operation outside their existing core banking, portfolio management, and risk systems. If it requires a separate stack and separate reporting line, it’s a side project by definition. 

“Interoperability lets digital assets tap into existing risk frameworks and feed the same downstream reporting rather than creating a second set of books. Where that exists, participation moves from pilot to production quickly, because the operational lift is incremental. Where it doesn’t, adoption is more likely to stall at the exploratory stage, because the integration work still needs to be addressed,” says Flury. 

According to Flury, five components come up in every serious build-out: an execution layer with smart order routing across venues, custody that supports a multi-custodian model, post-trade automation for settlement and reconciliation, real-time risk management covering positions and counterparty exposure, and reporting that keeps one internal book of records consistent across every venue and account. “The harder requirement is getting these components to function as one coherent system rather than five tools simply stuck together, including execution informed by live risk limits, settlement reconciled straight back into the internal book of record, and custody and connectivity managed centrally,” says Flury.

The direction of developments in tokenised assets and digital money is significant, says Flury, especially in terms of addressing or solving long-standing market inefficiencies. “Tokenised assets and digital money, such as tokenised deposits or stablecoins, open the door to settlement in minutes rather than the T+1/T+2 institutions have long lived with. This creates real implications for counterparty risk and capital efficiency. 

“But ‘helping to address’ is probably more accurate than ‘solving’ at this stage, since regulatory clarity is developing market by market, and on-chain settlement still has to interoperate with legacy rails,” says Flury. “But we see real progress coming from institutions that are treating tokenisation as an extension and evolution of existing infrastructure, not a parallel system.”

Structurally incomplete

Digital asset trading remains operationally complex for institutions because it requires far more than access to a trading venue or custody solution, says Arnab Sen, Co-Founder and CEO of GFO-X, a centrally cleared venue for digital asset derivatives. 

“For a real institutional market to develop, the full market structure needs to be in place: spot, futures, options and, increasingly, perpetual futures. If one of those legs is missing, the market is structurally incomplete. Derivatives are particularly important because derivatives markets are always and everywhere larger than spot markets. You can think of spot markets as the ownership layer whilst derivatives markets is where institutions hedge or express market views. They tend to be harder to institutionalise because they introduce counterparty risk, tenor risk, margining requirements and, in the case of options, more complex risk management,” says Sen. 

The greatest barriers to adoption arise across the full trading lifecycle, according to Sen. “Onboarding remains fragmented across venues, jurisdictions and regulatory regimes; execution is dispersed across exchanges with different market structures, contract specifications and credit models; custody and settlement introduce challenges around private key management, balance sheet exposure, collateral mobility and the movement of assets across venues and chains; and reporting must satisfy evolving regulatory, audit, governance and surveillance expectations. 

Institutions are not looking for a single-point solution. Operationally, they need the entire framework to work together: custody, execution, clearing, collateral, settlement, reporting, market surveillance, treasury and risk management. There is no silver bullet. If only one or two of those requirements are solved, large institutions will still struggle to connect.”

This is particularly true for banks and other firms managing third-party money, says Sen. “They face very high regulatory and operational hurdles before connecting to a new venue, especially through internal ‘new business’ approval processes. Regulation is necessary, but it is not sufficient. A venue needs a credible tier-one regulator, but it must also integrate with the way institutions already operate: their back-end providers, front-end OMS and EMS systems, pricing distribution channels, market abuse surveillance providers, banking partners, risk systems and post-trade workflows. Banks will not bend to a venue’s requirements; the venue has to bend to theirs. This creates a significant moat for any platform that can genuinely meet institutional standards.”

In addition, if you consider capital implications, for banks, access to a Qualifying Central Counterparty (QCCP) is critical because it enables significantly lower regulatory capital for centrally cleared exposure under the Basel framework, says Sen. “Clearing through a QCCP reduces counterparty credit risk and allows banks to potentially benefit from preferential capital treatment. As a result, QCCP status is a key determinant of market liquidity and participation. The banks are generally reluctant to clear through CCPs that do not provide capital relief.”

While the technology underpinning digital assets is relatively mature, institutions continue to require the same standards of control, transparency, resilience and risk management that they expect in traditional financial markets, says Sen. “The difficulty is not simply technology; it is building a market structure that institutions can trust, connect to, and scale.”

Liquidity fragmentation remains one of the most significant challenges in digital asset markets, says Sen. “Trading activity is dispersed across offshore exchanges, regulated venues, OTC desks, market makers, custodians and multiple blockchain ecosystems, each operating with different liquidity pools, jurisdictional frameworks, settlement processes, credit arrangements and contract specifications. This creates higher execution costs, inconsistent pricing, greater operational complexity and increased counterparty exposure for institutional participants.”

The challenge is particularly acute in derivatives, says Sen. “Many crypto-native exchanges perform too many functions within a single integrated model, combining execution, custody, clearing, settlement and sometimes lending within the same platform. This creates significant counterparty risk and insufficient checks and balances compared with traditional market structure. 

“It also makes it difficult for large institutions, especially those managing third-party money, to connect directly. Most need to trade through a prime broker or regulated intermediary, but those intermediaries themselves may be unable or unwilling to connect to venues that do not meet institutional standards for governance, segregation, client asset protection, insolvency treatment and risk management,” says Sen. 

A number of solutions have emerged to address fragmentation, including smart order routing, liquidity aggregation tools, off-exchange settlement networks, institutional connectivity providers and technology platforms that aim to reduce the need to pre-fund assets across multiple venues, says Sen. “These tools can help improve execution access and reduce some operational overheads, but they do not fully solve the deeper market-structure issues. Off-exchange custody and settlement may reduce direct exchange exposure, but they do not by themselves solve the balance sheet, leverage and capital efficiency challenges that institutions face. Likewise, there is no such thing as a CCP able to “clear” positions across multiple venues, meaningful netting and compression remain difficult where contract specifications differ across platforms,” says Sen

The industry has shown that the technology can work, but we are still some distance from a genuinely institutional-grade liquidity model,” says Sen. “Significant challenges remain around standardisation, interoperability, collateral mobility, cross-border compliance, post-trade processing, credit intermediation and workflow integration. Scaling digital asset markets to the levels of efficiency, resilience and automation seen in traditional financial markets remains a journey.”