Paul Golden

Why 2024 could be a watershed year for Digital Assets

May 2024 in Digital Currencies

Though the landscape remains complex, Paul Golden discovers that collaborative efforts are being made to establish more defined regulations and standards to govern the use of digital assets globally.

Different regions are moving at different speeds when it comes to digital assets – a trend that underscores the growing recognition of the need for oversight and consumer protection.

That is the view of Vinay Trivedi, COO sell side solutions at SGX FX who describes the SEC’s approval of spot Bitcoin exchange-traded products as a significant milestone for institutional investors by providing them with regulated avenues to invest in Bitcoin while diversifying their portfolios. He also refers to the positive impact of tokenisation in enabling fractional ownership and enhancing liquidity on digital asset exchanges, particularly for traditionally illiquid assets such as real estate or fine art.

“Automation through smart contracts enhances efficiency and reduces human error in asset management and tokenisation democratises access to investment opportunities globally,” says Trivedi. “Tokenisation also drives innovation, enabling new financial products and business models.”

Exchange efforts

The digital asset industry is experiencing significant advantages from leading exchanges prioritising secure platforms and robust trading environments. These efforts bolster investor confidence, mitigate the risk of hacks, enhance market liquidity and efficiency, ensure regulatory compliance, and foster innovation and product development. 

“Aggregation technology providers will also play a crucial role in enabling better liquidity management for digital assets, much as they have done for the FX market,” says Trivedi. “Advanced trading platforms, SOR algorithms and market structures will provide access to a larger pool of liquidity and make trading more efficient, reducing transaction costs. New liquidity pools and better risk management solutions will further boost stability.”

According to Trivedi, industry initiatives on fully regulated and secure ecosystems for trading, settlement and custody of digital assets are contributing significantly to market integrity, investor protection and overall confidence in the digital asset space.

The surge in institutional trading of digital assets has created a demand for advanced data and analytics solutions tailored to the unique needs of institutional investors.

“Aggregation technology providers will also play a crucial role in enabling better liquidity management for digital assets, much as they have done for the FX market.”

Vinay Trivedi

“Just like FX markets, participants are looking to access richer data sets and analytics related to spread, depth of liquidity, fill quality, rejection analysis, broker quality analysis, post-trade mark-outs, patterns study and client profitability analysis,” explains Trivedi, who adds that the surge in interest in digital asset derivatives and advanced trading methods like algorithmic trading and high frequency trading is driven by a combination of technological progress, rapid market expansion, institutional involvement, risk management needs and regulatory developments.

“Technological advancements enable sophisticated algorithms and tools, while market growth creates opportunities for diverse trading strategies,” he says. “Institutional participation seeks exposure to manage risk and achieve returns. Derivatives and algos help mitigate market volatility and regulatory clarity boosts investor confidence.”

Geographical variations

Regional disparities in institutional trading and investing in digital assets have been influenced by various factors including demand dynamics, regulatory environments, market structures, risk perceptions and the development of custody solutions and infrastructure.

Trivedi reckons Asia in particular is poised for significant growth in digital asset trading, driven by its large population, strong trading traditions and increasing government interest, with countries like Singapore, Australia, Dubai and Hong Kong leading the way in shaping the market’s future.

“Clear regulations facilitate faster adoption, and market maturity and risk perception influence investment pace with cautious approaches in risk-averse regions,” he adds. “Growth relies on secure custody solutions and infrastructure, favouring regions with advanced options.”

“Stablecoins, CBDCs and all the other elements of tokenisation need to develop further in order to accommodate trading activities.”

Carlos Martin Doncel

Meanwhile Carlos Martin Doncel, product manager for digital assets Swissquote says the arrival of spot Bitcoin ETFs clears the way for many types of institutional investor to get into crypto in a region that dominates the global financial market.

“The moment big institutional investors (retirement and sovereign wealth funds) announce either their intention or actual investments into crypto, we will see the real potential of these ETF approvals” he says. “It’s a slow process to change the rules of investment funds and I don’t think we will see a paradigm shift in institutional investment just yet, but it is an important development.”

Settlement challenges

Martin Doncel says banks see tokenisation as a way of updating the settlement system from scratch.

“When we talk about securities settlement the fiat component is often forgotten,” he says. “It is not particularly sensible to tokenise a stock if the fiat rail is going to take two days to settle. Stablecoins, CBDCs and all the other elements of tokenisation need to develop further in order to accommodate trading activities.”

According to Martin Doncel, crypto exchanges have become serious competitors to traditional exchanges and have encouraged traditional markets to think differently, with a recent proposal to open the traditional market 24/7 for example. 

“You see a lot of fiat payment rails following SEPA instant initiatives, for instance the Fedwire initiative in the US,” he says. “It is healthy to have this competition where traditional players move towards instant settlement and faster transfers.”

When asked to assess the importance of industry initiatives on fully regulated and secure ecosystems for trading, settlement and custody of digital assets, Martin Doncel observes that lack of regulation led to the situation with FTX and BlockFI – although he also notes that systemic hacks to centralised exchanges have become less commonplace.

One area that has clearly evolved considerably is data analytics. Just a few years ago the best option for crypto market analytics was a Dune community dashboard, which could be described as being akin to Power BI or Tableau – now there is an entire ecosystem of companies, including the likes of Token Terminal (recently partnered with Bloomberg), Messari, Arkham and many other data vendors that are specialising in this area driven by demand from institutional investors.

Fund influence

As for where we might expect to see regional variations in the growth of institutional trading and investing in digital assets this year, Martin Doncel says large pension or sovereign wealth funds have the ability to move the dial more than the introduction of spot Bitcoin exchange-traded products.

“For example, if the Kuwait Investment Authority said it was holding even a relatively modest amount in Bitcoin, that would have a massive impact on institutional appetite for the asset class,” he says.

Geopolitical tensions are another driver on the basis that where there isn’t a suitable fiat currency to choose from, cryptocurrencies could fill the gap.

“It is not easy to receive dollars in Venezuela or Argentina, so why wouldn’t someone send Bitcoin that can be exchanged for local currency,” says Martin Doncel. “It remains to be seen if any country will buy or sell commodities for Bitcoin, but it would be a significant development.”

Looking at the EU specifically there is certainly going to be greatly increased clarity with MiCA and while this is only the first iteration of the crypto regulation, it will give investors confidence according to Miryusup Abdullaev, managing director of Deutsche Börse Digital Exchange (DBDX).

“Investors and banks are interested in Bitcoin but many of them want to start small and therefore the business case is very sensitive to integrating new systems and service providers,” he says. “So it really helps to put crypto on top of existing infrastructures which are already integrated.”

ETF ‘validation’

Abdullaev describes the approval of spot ETFs in the US as a kind of validation of Bitcoin in terms of bringing it over the institutional grade threshold, although it remains to be seen what specific client segments were behind the initial inflows.

“In Europe we have had exchange traded products (ETPs) for Bitcoin and other cryptocurrencies since 2020,” he adds. “They are slightly different legally and operationally to the US spot ETFs, but they still effectively offer indirect participation in the price development of crypto. What we have seen after the ETF launch in January in the US is that the management fees of these ETPs started coming down because clients now have other options.”

“From the infrastructure provider perspective we see increasing interest in tokenisation in terms of proof of concepts.”

Miryusup Abdullaev

On the topic of tokenisation, Abdullaev observes that decentralised finance applications – or rather the underlying protocols like Ethereum – are really good at innovation. Where institutions remain sceptical is around their stability and compliance, so the longer these protocols exist and operate well and in best interest of end clients the less scepticism there will be.

“From the infrastructure provider perspective, we see increasing interest in tokenisation in terms of proof of concepts,” he says. “The challenge remains getting to volumes that would justify the level of investments needed to get there.”

Data analytics is one of the biggest pain points for sophisticated market players. For example, a hedge fund transferring its trading strategy from traditional asset classes to crypto just doesn’t work without reliable, complete and accurate data. “There are established data providers for traditional asset classes but they don’t reflect the whole market, partly because some parts of the market are still in offshore locations that are unregulated and unreported,” says Abdullaev. “But demand will be met over time as the market matures.”

There is certainly going to be greatly increased clarity with MiCAR

Trading trends

When asked about the factors driving increased interest in digital asset derivatives and more advanced trading styles such as algos and HFT, he refers to perpetual futures contracts – which are already quite popular in the unregulated space and are an interesting extension for those who want to expand their derivatives offering.

The surge in institutional trading of digital assets has created a demand for advanced data and analytics solutions

“Around two thirds of traded volumes in crypto are in derivatives and the majority of that is perpetual futures contracts, which shows that clients are interested in these instruments to make more sophisticated bets on the direction of the market,” says Abdullaev.

The managing director of DBDX reckons institutional adoption will flourish where there is regulatory clarity and a mature market structure as well as trusted partners.

“The EU is at the forefront in all these dimensions and the UK is making progress, so we are hopeful that a regulated landscape will create conditions for institutions to engage with crypto,” he concludes.