By Javier Rodriguez-Alarcon, Chief Commercial Officer and Head Digital Investments Strategies, at XBTO
The recent resolution involving Binance represents the latest milestone in the cryptocurrency industry’s journey towards maturity. During this period, efforts to address systemic risks and the exit of vulnerable participants have been notable. The significance of the industry’s transition from an alternative financial system to a regulated and predictable environment cannot be overstated. The market is actively evolving into one that institutions can readily embrace. Consequently, the industry stands at the threshold of its next wave of adoption.
With an influx of new institutional players moving to the space, how can they set themselves apart from the competition and emerge as the winners of the evolved digital assets landscape? Below are four key tenets that institutions may adopt to succeed in the next market cycle.
Embracing Convergence Between TradFi and Digital Assets
We are seeing a new era of convergence unfolding between traditional finance and digital assets. Financial institutions are increasingly embracing digital assets and finding great success. For example, Chicago Mercantile Exchange (CME), a global derivatives marketplace founded in 1898, began offering Bitcoin futures to clients in 2017 and is now the second largest exchange to offer the asset class, behind only Binance. During this next phase for the industry, market leaders will likely be those that create products that intersect between the two realms. To achieve this, it’s essential to grasp the evolution digital assets have undergone since their inception. Now, with more data available from several market cycles, institutions and investors can more effectively assess digital assets’ risk/return profiles. With this informed understanding, the asset class can be said to be more mature and accessible in the eyes of prospective investors.
Many institutions are opting to house digital assets within traditional financial structures, not only evidenced by CME, but also the large number of spot Bitcoin and Ethereum ETF applications. This brings the asset class into familiar territory for both the institution offering the asset and the investor engaging with it.
Cultivating a Compliance and Risk-Centric Culture
The next market cycle will focus on engaging with digital assets in a regulated and compliant manner. The industry still has some ways to go following the high profile collapses seen over the last two years. Going forward, regulation and risk management will become a prerequisite for any institution to engage with crypto. Much progress has been made in terms of risk management and regulatory frameworks for digital assets. There are several progressive jurisdictions who already benefit from credible, comprehensive guidelines that institutions can partner with, such as the Market in Crypto-Assets Regulation (MiCA) in the EU and the Digital Assets Business Act (DABA) laid out by the Bermuda Monetary Authority.
Adopting Proven Security Frameworks
Today’s best practices in security constructs from the traditional finance industry are relevant when it comes to digital assets. For example, security architecture should always prevent a single point of failure – which has been the foundation of traditional security frameworks. Additionally, while cybersecurity concerns may be magnified in the digital asset space, risk mitigation operates within the same structures as with traditional industries. So, institutions who can adapt well-tried frameworks will be able to scale effectively in digital assets. On the other hand, for the risks that cannot be managed using traditional methods (e.g. custody of digital assets), crypto-native securities companies are very well placed to close the knowledge gap and offer financial institutions services and products that can help them mitigate these risks. Doing so will allow institutions to overcome the idiosyncratic risks inherent to blockchain technologies.
Building Collaborative Partnerships
The industry is witnessing what may have been inconceivable not so long ago: multiple collaborations between traditional financial institutions and digital asset firms. For example, APEX the largest fund administrator and XBTO to provide regulated custody and digital assets execution to their institutional clients, JPMorgan recently collaborated with interoperability layer Axelar, infrastructure provider Oasis Pro and Provenance Blockchain to tokenize funds. Additionally, Paypal has partnered with New York Department for Financial Services (NYDFS)-regulated Blockchain infrastructure provider Paxos to offer Stablecoins to its users. Other institutions that follow suit may put themselves in good stead to lead in the next market cycle.
