Seth Johnson, CEO of NEX Markets spoke about the challenges faced in the cryptocurrency space in comparison to that of the traditional markets, during the Institutional Crypto Conference, held earlier this week. He also spoke about the structural changes required for the adoption of institutional investors in a scalable manner.
The CEO started off by stating that there is a “huge appetite” in the institutional space for trading cryptocurrency assets. He further added that the institutional investors are waiting for a more structured and organized marketplace where they can operate and specifically, the “cash space”.
Johnson further stated:
“… the amount of noise does seem to be directly correlated to Bitcoin [BTC]s price and other crypto assets and it is a little bit quiet now than it was this time last year. But nevertheless, there is clearly an appetite to look for ways to deploy capital when it comes to […] hedge funds. But obviously, it is not without its challenges.”
He went on to speak about the challenges faced by in the cryptocurrency market for the institutional investors and stated that Fidelity’s announcement earlier this week was the first step towards solving the problems. The problems, according to him, are related to custody. Johnson elucidated that the institutional investors were not a big fan of buying and selling assets which can “disappear” and later on impossible to recover. The most important aspects they are looking for in a market is the existence of custodial services which are credible, well-insured and secure.
“So I think, what’s being announced today is hugely important in a way that the market based at the moment, the platforms get to the retail clients. There is very little […] segregation between custody, excecution, participants on the platform and I think all of these distinctions need to be much clearer if institution fiduciaries are going to start participating in that space.”
Johnson further stated that the existing market’s ownership structure is a little bit “opaque” and the dealing rules are not “very clear”. He added that the cryptocurrency service providers are usually start-ups built by software engineers who do not have “much experience” in terms of running platforms or custody services. He continued to say:
“…it is a little bit like the wild west.”
The CEO also spoke about the key product required to drive in more institutional investors into the cryptocurrency markets in a scalable manner. He believes that custody is the absolute key to the adoption of institutional investors. He stated that without a credible large-scale custodian, it would be difficult for the market to “become anything other than a retail speculative marketplace”.
Johnson further added that the creation of a credit market was very important for the market even though it was going to take some time. He stated that there are only small-scale leverages which are available only to retail investors and it would become more expensive and risky if one tries to avail leverage services from multiple platforms. This was mainly because the current platforms, according to him, have unknown ownership structures operating in all jurisdictions.
He continued to say:
“It’s very challenging for an institution to have a access to goods that are out there and therefore feel comfortable. They can either exit or enter this marketplace without having huge fictional cost and take on a huge execution risk. So I think, having that centralized service is important. So credit can be developed from there. Once we have few institutions with significant amounts of inventory in custody and those are credible institutions, that’s when a borrowed markets start to develop. “
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