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By James Corcoran, SVP Customer Value, KX
Global cryptocurrency and digital assets markets are rapidly increasing, with daily announcements of new exchanges, tokens and coins, futures, options, and swap contracts. Countries and Governments are jostling to welcome these assets and institutions while banks are poised to embrace these new markets as a means of broadening their services and making themselves more attractive to clients.
President Biden’s recent executive order titled ‘Ensuring Responsible Development of Digital Assets’ sends a signal that the US wants to be seen as a leader in the international governance of cryptocurrencies and, de facto, a good place to do business. The UK Government also announced that it intends to regulate some cryptocurrencies while Dubai is promising tailored regulations after recently granting its first virtual asset licenses to exchanges including Binance.
Despite ongoing concerns around criminality, regulatory oversight, environmental sustainability, and the impact that digital currencies could have on established markets, these developments show that crypto is moving from its existential to its institutional phase. The huge volatilities in pricing, settlement challenges, and criminality are giving way to a more mature ecosystem with a growing base of market makers serving a larger body of mainstream investors.
Managing risk, driving innovation
The market volumes, venues, and the number of digital assets are now too big and fast-moving to be analyzed and managed by what was in place during crypto’s existential phase. Spotting and maximizing market opportunities or reacting to issues requires a strong data capability, and participants need help to analyze the digital assets space using techniques and capabilities created and perfected in the traditional asset classes.
At KX, we have a long history of helping financial institutions research, structure, backtest, and trade innovative new financial products across all asset classes. We believe that the fundamentals behind trading and regulating crypto are very similar, albeit we’re now operating in a more dynamic market where there is an inherent distrust of doing things the ‘traditional’ way! Whether it’s investors seeking alpha with automated and/or algorithmic-driven trading, exchanges looking to add new features and bring new products to market within hours not days, or authorities demanding market regulation, real-time streaming analytics platforms like KX can play a critical role in helping organizations use data to innovate and move faster.
We’re already working with some of the most forward-thinking firms in this space and we believe that this will have a knock-on effect on other institutions that currently recognise the value of deploying KX in existing financial markets.
All of this ladders up to – we hope – greater stability, security, and efficiency which will, in turn, lead to more innovation and competition in the sector. This should present a huge opportunity for all parties. More broadly, competition and choice within the financial services sector can only be a good thing for the wider investment community. The benefits of stablecoins for example can be considerable. In a Harvard Business Review piece from 2018, economists cited lower-cost, safer, real-time, and more competitive payments compared to what consumers and businesses experience today. They could also connect unbanked or underbanked segments of the population to the financial system.
However, they also sounded a very real note of caution saying that, without robust legal and economic frameworks, there’s a risk that stablecoins would be anything but stable. Challenges also exist around how crypto fits into global taxation, banking fees, and other commercial structures. Currently, digital assets sit outside many of these jurisdictions.
At their heart, crypto and other digital assets are simply new asset classes, and compelling arguments can be made for them to be embraced by the global financial services community. The transparent, public nature of the blockchain means that with the right technologies, processes, and regulations, risk can be managed to an acceptable level, at least in the assets that the exchanges, funds, and regulators decide to bring into their sphere of oversight and trading. As mentioned already, the holistic approach to trade surveillance championed by KX is already well established in the wider financial services sector. It is equally well suited to bring the levels of oversight and governance required for digital assets.
Our relationship with Crypto Compare, while at an early stage, is already leading to extremely interesting conversations around how market data is centralized and delivered in this evolving space. With similar conversations held between KX colleagues and delegates at the recent CryptoCompare Digital Asset Summit in London, it’s clear that crypto and digital assets are well down the path of institutional acceptance.
With the right regulatory and governance frameworks in place – ones that provide security and stability without stifling innovation – there’s no reason why that journey shouldn’t continue. For KX, this presents a significant opportunity to work with both existing clients and new customers, to help shape the future of the sector and the global financial industry as a whole.