As the introduction of digital assets become increasingly common, their influence on traditional finance is becoming more notable, blurring the line between two seemingly separate, and arguably parallel, financial instruments.

Think of exchanges that now have a digital asset offering, banking giants which have dedicated units and the wave of experienced personnel who have made the transition from traditional finance to this burgeoning sector.

From the rise of blockchain technology to the proliferation of tokenisation – as well as the increased, yet still debatable, acceptance of cryptocurrencies as ‘legitimate’ assets – the impact of digital assets is evident across several facets of the financial ecosystem. The industry can now differentiate between ‘crypto’ and ‘digital assets’, while the old ‘Wild West’ comparisons for the former have now been replaced with opinions of ‘bad actors, not bad assets’.

What doesn’t seem up for debate is the potential of blockchain and how tokenisation will shape the markets of the future.

“For us, blockchain really is an enabler – looking from an infrastructure, product and a client facing perspective – to make processes in the long run safer, more efficient, while also reducing costs and enabling us to create accessibility, especially for retail investors, to additional products which are not tradable or fungible today,” says Christoph Hock, head of tokenisation and digital assets at Union Investment.

Blockchain, at the highest level, is about providing additional transparency, and with that, the opportunity for composability and less need for reconciliation, argues David Newns, head of SIX Digital Exchange (SDX). However, Newns also highlights the importance of regulation to improve and ensure investor protection within this specific asset class.

“The role that institutions play in this space is to find ways to enhance investor safety. When it comes to crypto assets, the notion that you have regulated institutions which are transparent and compliant with regulations will mean you trust them as a counterparty to provide services,” asserts Newns.

“That gives you the confidence that your assets are safe and that your activities are being conducted in the most fair and equitable way possible.”

The importance of regulation

In addition to helping foster investor protection, regulation in digital assets can help ensure market integrity and promote stability in an increasingly digitised financial landscape. Without appropriate oversight, digital asset markets can be left susceptible to fraud, manipulation and other illicit activities.

Regulators can also help facilitate mainstream adoption by bridging the gap between traditional financial and digital assets, contributing to the long-term sustainability and legitimacy of the digital asset ecosystem.

“Our key focus, as of now, is on crypto securities and that’s where governance is clearly required,” emphasises Hock. “All the negative issues around crypto, like FTX and Bankman-Fried which came up in the past, are based on human fraud. It’s not malfunction of the blockchain but human misbehaviour, in combination with a lack of regulation, for example in the US. Therefore, governance is key to ensure that the trust our investors have in us as an asset manager can be fulfilled.”

Impacts on infrastructure

Market infrastructure is being reshaped by digital assets through the introduction of new methodologies for ownership, transferability and transparency. Unlike traditional financial assets, digital assets leverage blockchain technology, enabling peer-to-peer transactions without the need for intermediaries.

The continued evolution of digital assets is helping catalyse the transformation of market infrastructure, shaping a way for a more inclusive, efficient and resilient financial landscape. However, there are still limitations as to how much can be gained in terms of infrastructure in the traditional financial landscape – one being the cost of any change.

“Typically, trading a digital asset requires new functionality such as a digital custodian, new post-trade integrations and/or trading connectivity – anytime a traditional financial firm has to put something like that in place, there has to be a really strong commercial case for why they do that because it’s timely, costly and expensive,” explains Duncan Trenholme, global co-head of digital assets at TP ICAP.

“The reality is if you are going to bring liquidity in from the traditional markets then the new digital trading experience has to be dramatically efficient or cheaper for clients to change their infrastructure.”

With developments linked to blockchain and digital assets surging and subsequently presenting various use cases and areas of improvement for the traditional finance landscape, the phrase ‘don’t fix what isn’t broken’ comes into mind. Traditional financial markets have existed for much longer than digital assets and because of that, any major shifts should be carefully considered.

“Looking at the intersection between blockchain and traditional banking, traditional banking has so much efficiently already in it, despite what you might sometimes hear. It’s highly optimised, it’s very efficient, but there are areas that we can certainly bring significant benefits through blockchain technology,” highlights Newns.

“To get the fundamental benefits, it’s hard work and it’s all about building and getting all the various participants comfortable. In crypto you’re taking traditional structures and you’re trying to accommodate a new asset class into them. In tradfi, however, we’re trying to get an existing asset class and then bring it into a new technology, which can be difficult.”

Where parallels meet 

Traditional finance and digital assets typically operate as two parallel and distinct markets at present, but increasingly there is overlap between the two. Settlement, something that tends to be instant within digital assets – particularly when it comes to cryptocurrencies – is something we see influencing the traditional financial landscape.

However, there is still a lot of work to be done on either connecting the two systems or uplifting the traditional financial systems to be able to support digital assets.

“In traditional finance, we’ve moved to shorter and shorter settlement times. Within securities markets we are currently discussing how to move to T+1 settlement from T+2 and make sure we avoid trades failing at scale,” says Trenholme. “Within crypto they’ve started with the premise of moving collateral within minutes or hours. Crypto challenges the way that traditional markets operate and have grown to operate over the years.”

Looking at what can be learned from digital assets, legacy systems and the need for increased modernisation to bolster efficiency comes into play. Limitations linked to message-based architecture is something market participants are fully aware of, and something that the seemingly parallel nature of digital assets emphasises even more.

“You just can’t do the sort of composable transactions and achieve the reduction in requirement for reconciliation when you’re still sending messages from one platform to another platform. We’ve optimised, but at the same time are inherently constrained by the fact that it’s not instantaneous,” says Newns.

Cryptocurrencies, specifically, have been viewed as attractive due to their ability to be traded 24/7, including on weekends and holidays. Unlike traditional financial markets, such as the equities space, cryptocurrencies are not limited by set trading hours and can operate continuously. Given that they are decentralised and traded across a range of global exchanges, they allow participants to buy, sell and trade cryptocurrencies at any time.

Whether traditional finance will mirror the around-the-clock model is yet to be seen, with varying arguments on whether demand for it exists and whether or not the shift is even feasible.

“You do see some discourse in the news about clients wanting to shorten market hours in certain asset classes, so we should challenge the assumption that just because we can operate markets 24/7, as we see with crypto, that we should operate markets 24/7,” argues Trenholme.

“Ultimately, if you think about the notional of assets that have been tokenised today, it’s still a drop in the ocean compared to the size of traditional finance. As such, it is easy to have a certain scepticism about how meaningful and relevant this could be if you are sat within a traditional business. There’s a lot of promise, and the technology could improve the market considerably, but it hasn’t reached a scale yet where it’s forced clients to alter the way that they trade. That tipping point has not yet been reached.”

Moving forward

Despite the current operation of digital assets and traditional finance as two separate parallels, digital assets’ influence is evident in the increasing integration of blockchain technology into financial infrastructure.

Institutions are exploring tokenisation of assets, converting traditional assets into digital tokens to enhance liquidity and improve accessibility. 

Hock tells The TRADE that Union Investment are one of the first asset managers in this area combining the traditional asset world with the tokenised world.

“For us, our view is that within three to five years of tokenisation of assets – not only of traditional assets but also of products which are not tradeable and are not fungible today – this will become a new normal. Important to highlight that we are not only talking about assets on chain, but also cash on chain, i.e. e-money. This consideration will be most powerful.

“Looking five years down the road, I’m sure tokenisation will become a key topic here for the entire ecosystem and has the potential to be a disruptor and a game changer for the financial industry.”

Digital assets are here to stay and their influence on traditional finance is undeniable. Although still a small fraction of the entire financial ecosystem, it’s clear that digital assets, the innovation linked with them, and the lessons learned from the asset class are influencing the way in which future developments within traditional will be approached.

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The integration will provide FalconX access to competitive pricing and liquidity from TP ICAP’s wholesale clients.

FalconX’s institutional crypto native franchise and institutional-grade custodial capabilities provided by Fidelity Digital AssetsSM will also combine with TP ICAP through the integration.

“Collaborating with Fusion Digital Assets is another significant step in our ongoing efforts to bridge traditional financial markets and the growing crypto asset ecosystem,” said Austin Reid, global head of revenue and business at FalconX.

“This will enhance liquidity for our clients and foster an environment that propels growth and innovation in the digital asset industry. It underscores our commitment to providing secure, efficient, and seamless access to the global digital asset market for our clients.”

This integration will help bridge together the native crypto asset ecosystem and traditional financial markets, enabling improved transactions and accelerating growth in the digital asset industry.

“Bringing a player of FalconX’s pedigree onto Fusion Digital Assets is another step forward in the growth of our exchange,” said Tom Flanagan, global head of execution and liquidity management at TP ICAP Digital Assets.

“Our aim is to offer clients a unique liquidity experience in a secure environment. FalconX’s integration and support of Fusion Digital Assets advances our aim. We look forward to extending our diversified liquidity to FalconX and their franchise.”

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Previously, he also served as global head of institutional sales at TP ICAP, and before that worked as head of sales EMEA and Asia Pacific at BGC Partners for two years.

Earlier in his career, Hinxman has also held senior positions a CME Group before departing in 2015, most recently working as head of sales and commercial development for CME Europe.

His experience also encompasses hedge fund related roles, including futures and options trading and work on a fixed income desk.

Read more: TRADE Tales: From battlegrounds to the trading desk

Last September, another individual from TP ICAP, Frédéric Benizri, announced his departure. He joined financing, investment and risk management business CIC Market Solutions as a sales trader.

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We expect 2024 to see the wholesale cryptoasset market professionalise and become increasingly serviced by traditional brands and providers. Spot exchange operating models will continue to unbundle, with the separation of execution and custody becoming the default for institutional market participants; this unbundling will protect investors. We expect a continued shift of trading activity to more traditional, regulated exchanges and venues.  

In November, CME overtook Binance as the leading exchange from an open interest perspective on the bitcoin futures contract. We believe that will be seen as watershed moment for the broader crypto derivatives market. Overall spot volumes, once dominated by offshore exchanges, will begin to migrate toward more regulated providers. Tokenisation has been a key narrative over the last 12 months, and we expect more of the same from banks in 2024. On chain cash, specifically stablecoins will be increasingly recognised as one of the most important use cases for crypto. Despite the performance of bellwether asset bitcoin, crypto as an asset class has remained muted throughout 2023. With the ongoing professionalisation of the industry, alongside the likely approval of spot-based Bitcoin and Ether ETFs in the US, we believe 2024 could be defined by a significant shift in overall sentiment.  

James Butterfill, head of research, CoinShares 

Next year is shaping up to be a pivotal one for digital assets, with several key developments on the horizon. A major highlight is the anticipated launch of spot-based Bitcoin ETFs in the US, a process that has been in the making for nearly a decade since the first application was submitted to the SEC. This launch, coupled with the SEC’s explicit approval, is set to unlock market access for numerous investors, marking a significant milestone in the acceptance of digital assets. While it’s challenging to predict the exact scale of investment inflow post-launch, even a conservative estimate of 10% of the current assets under management (around US$3 billion) could potentially elevate Bitcoin prices to around US$60,000. 
 
Additionally, 2024 will witness a halving in Bitcoin’s supply, reducing the daily production from 900 to 450 bitcoins. This supply cut has historically supported price increases. Monetary policy remains a crucial factor influencing Bitcoin’s valuation. The bursting of the digital asset bubble can be attributed in part to shifting investor preferences towards more attractive stores of value like treasuries, as interest rates rise. While we anticipate interest rate cuts in both the US and Europe in 2024, it’s important to note that prolonged higher rates could temper potential price gains in Bitcoin. 
 
Lastly, the increasing correlation between bonds and equities, now at a record high of 42% excluding the Covid period, is prompting a search for effective diversification among investors. In this context, Bitcoin has proven to offer significantly greater diversification compared to other asset classes. The growing recognition of this fact among investors could further influence Bitcoin’s adoption and valuation in the coming year. 

Rob Wing, head of digital assets, 4OTC 

The adoption of digital assets trading by institutions will continue in 2024. Institutional investors are increasingly diversifying their portfolios with a range of crypto assets, including Bitcoin, Ethereum, and other more established cryptocurrencies. In addition, the SEC is expected to approve a batch of Bitcoin ETFs in January, which will make it significantly easier for large pools of institutional capital to be deployed, pushing Bitcoin prices higher (with some predicting a new all-time high). 

The market will continue to be highly fragmented, which drives the need for institutional-grade infrastructure in the form of robust and low latency connectivity. In addition, crypto exchanges will embrace the separation of custody and execution, with pre-trade inventory and credit checks becoming standard amongst institutional players.  

In FX, the velocity of trading is likely to increase, driven by quantum computing applications which will enable more algorithmic trading, supporting complex calculations at unprecedented speeds. Reduced market data price feed intervals on firm venues will reduce hold times further for FX liquidity providers, leading to a rise in firm pricing, which will overtake last look liquidity provision by volume within 18 months. In addition, with an increased focus on post trade due to T+1 FX settlement, clients will look to diversify risk, increasing the number of their prime broker relationships. 

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His most recent role at the inter-dealer broker was as a cross asset sales trader, having spent seven years with the business.

Benizri also previously worked in convertible bonds and equity derivatives flow sales at Citi for three and a half years, at the time based out of London.

Prior to that, Paris-based Benizri worked for UBS, in a structured products sales role.

Earlier this year, The TRADE revealed that TP ICAP Midcap and Liquidnet had partnered to improve block liquidity in the European small and mid-cap equities space through their combined networks and technology.

Around the same time, TP ICAP picked up a minority stake in real-time data sharing and workflow platform, ipushpull as part of a Series A funding round.

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TP ICAP’s data and analytics division, Parameta Solutions, has launched a new family of interest rate volatility (IRSV) indices in a bid to provide robust and transparent daily indices in interest rates swap markets.

Anand Venkataraman, head of benchmark and indices product management at Parameta Solutions, explained that as IRSV indices are built on a theoretical foundation when measuring interest rate swap volatility, it allows for a model-free measure of spot implied volatility for market participants.

Venkataraman added: “Predictive power of model-free implied volatility estimates have been shown to have superior predictive power over other commonly used volatility forecasting measures. Such an approach to create IRSV indices will be able to assist market participants with accurate interest rate volatility measures, both when making investment decisions and when measuring investment risks.”

In practice, the indices are set to be powered by ICAP data and analytics – which includes a range of interest rate products, such as exotic options and short and long-term interest rate swaps.

Parameta Solutions will administer, calculate and disseminate the IRSV indices. According to the business, “IRSV indices provide market participants with a forward-looking implied volatility measure for some of the most liquid option expiry, swap tenor combinations in the EUR and GBP interest rate swap markets”.

The firm provides users with pre- and post-trade analytics, as well as unbiased OTC content and proprietary data, price discovery insights, and risk management services. Its offering also includes benchmark and indices, and the business was recently recognised as an EU benchmark administrator by ESMA.
 
The post-trade offering helps users control their counterparty and regulatory risks. The tools manage balance-sheet exposure and also provide compression and optimisation services.

Will Ferguson, senior managing director ICAP G10 Rates, said: “Central Banks hiking policy rates rapidly from near zero levels to combat rising inflation, and uncertainty driven by other regional events has created opportunity and volume in our interest rates business. A partnership with Parameta Solutions to develop innovative solutions like the IRSV indices will facilitate new liquidity opportunities and help us enhance our leadership position.”

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Panellists shared their insights as to what more needs to be done for digital assets to experience mass adoption for institutional investors.

 “As an industry it always makes sense to take stock of where we’ve come from and have a think about where we’re heading,” said Simon Forster, global co-head of digital assets at TP ICAP.

“2022 will be seen as a watershed moment for the crypto asset industry and I think you see two very different tails on either side of 2022. The industry was predominantly retail driven, it was speculative that the number would go up and there were hundreds of vertically integrated exchanges, often operating in unfamiliar jurisdictions or lightly regulated jurisdictions. If you fast forward to 2023 and where we are today, you see much more meaningful activity from the buy-side.

“Whether you’re an asset allocator or whether you think about portfolio construction, Bitcoin has been one of the best performing assets over the last few years and it’s part of the conversation for the buy-side.”

Appropriate regulation has been suggested as one of the important developments necessary to help with the adoption of digital assets at an institutional level.

“In Switzerland we have a regulatory framework to help us classify tokens,” said Valerie Noel, head of trading at Syz Group. “From the trading point of view, we have seen some issues with accessing liquidity because you need to go to crypto brokers and for us it was quite difficult to find regulated crypto brokers. We are a regulated bank, so we need to trade with regulated parties and then to find firms that are able to aggregate all this liquidity.

“In the future we need people who can provide infrastructure to put all this liquidity together to have better access for the buy-side. We really need this traditional finance, this liquidity aggregation, for mass adoption.”

Claire Bridel, chief operating officer at Liquidnet noted that the crypto industry has been seen as parallel to the financial world, with standards below those of traditional finance. “As market participants, those standards need to align to those of the traditional markets to see greater adoption,” she suggested.

Panellists also discussed the importance of utilising existing workflows and processes to aid the adoption of digital assets by institutions; arguing that it is impractical to try and reinvent methods in order to cater to this relatively new asset class.

“Crypto is a reasonably insignificant asset class at the moment in terms of size; we think it has the potential to become much more significant, but we also think it’s very unlikely that big buy-side and institutional clients are going to change those workflows that they have established for traditional markets – equities and fixed income as an example. From our perspective, that execution component which is very mature and very well understood will not change,” Foster added.

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The investment is the first institutional funding received by ipushpull and will see TP ICAP take a minority stake in the business.

The ipushpull platform claims to help improve decision making, efficiency, data connectivity and user experience for customers across financial markets by enabling financial institutions and data-driven companies to share live pricing and trade data. This is then delivered to a customer’s preferred application as needed.

It is used by clients including NatWest Markets, BNP Paribas, Insight Investment, Trayport and ETD.

Since 2018, TP ICAP has been a user of ipushpull’s services, and this investment will result in a closer integration of ipushpull’s technology in TP ICAP’s Fusion Connect offering to enhance TP ICAP’s client experience.

“Data is a kingmaker in modern markets. Having fully integrated, efficient data workflows is essential to the success of banks, brokers, asset managers and data providers,” said Matthew Cheung, chief executive of ipushpull.

“We are therefore delighted to have received our first institutional investment from long-term partner, TP ICAP, marking an exciting new chapter for ipushpull – deepening our relationship with the firm and giving our business a platform to accelerate growth.”

Following the deal, TP ICAP’s group chief investment officer Dan Wray will join the board of ipushpull.

“I’m delighted to conclude this investment as we continue our journey to offer best-in-class services to clients through our Fusion platform,” added Wray.

“We see strong demand for the ipushpull product in the very near future, and I’m happy to join the board to help them on that journey.”

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Simon Forster and Duncan Trenholme, co-heads of digital assets, TP ICAP:

Alex Walker, VP global network sales for crypto, IPC: Under constant pressure from investors to seek out stronger returns, hedge fund attentions are still likely to be on the high risk/high reward world of crypto in the New Year. One of the attractive elements about crypto for the algo driven hedge funds is that the completely unregulated nature of the market is yielding some very strong returns for investors. However, 2023 could be the year where regulation of the crypto market starts to take shape – with directives such as ESMA’s Markets in Crypto Assets (MiCA) recently approved by the European Parliament. As the regulatory landscape becomes clearer, hedge fund managers currently reaping the rewards from a lighter touch regime will need to adjust quickly. This is when these same hedge funds will need a complete solution for their existing trading requirements to plug in to raw and normalised market data – not only connecting them to regulated crypto exchanges, but also to transit through to those major counterparty-to-counterparty hubs.

Edmond Goh, head trader, B2C2: Next year looks set to be a year of cautious rebuilding. Overall volumes will likely remain depressed to start as investors stay on the side lines barring any further shocks. The FOMO trade is dead and won’t be resurrected anytime soon. What will drive markets in its place? OTC volumes have been resilient in the face of negative news, indicating that market structures have matured despite these trying times. They will mature further next year as demand for transparency around firms’ balance sheets and business models grows. Trading will continue to shift from retail to institutional, so more TradFi best practices, such as risk management, governance, and accounting, will become the norm.

The institutional market will also move to establish clearer boundaries between trading and lending as crypto market structures evolve – a process that was happening before FTX imploded but will now accelerate as a result. At the same time, Defi markets and DEX’s are gaining share with retail traders, who potentially feel safer retaining custody of their funds. Crypto regulation will also accelerate next year. The European Union’s MiCA comes into force in Q1, but its limited geographic scope highlights the key issue: crypto is global and regulation local. How will governments address regulatory arbitrage? And what adjustments will they – and the entire industry – make in the wake of FTX’s collapse? It’s too soon to know the true extent of the fallout, but a more grown-up market is already appearing in its wake.

Toby Norfolk-Thompson, chief investment officer, Matrixport: We believe that decentralised finance (DeFi) is a game changer with the potential to financialise all aspects of life and collapse operational costs and risk. For instance, DeFi can unlock value for a huge range of assets such as membership rights or media royalties currently largely untouched by traditional finance and by making these assets available for transactions, substantial value can be created.

Similarly, DeFi’s role in infusing transparency and accountability into financial services cannot go unnoticed. Ongoing developments in the digital assets industry have underscored the importance of segregating custody, clearing, and transaction settlement. In recent days we have seen trust collapse in a number of centralised financial platforms whilst DeFi has continued to perform and deliver.  In the long term, we see this trend enabling all financial markets to become more decentralised via this technology.

As DeFi increases in systematic importance, regulators around the globe will be motivated to develop qualifications and certifications for digital asset financial services to instil investor confidence in decentralised markets.  This endeavour will be coupled with more research and education about the underlying technology and its applications, ultimately accelerating the adoption of DeFi.

The post The TRADE predictions series 2023: Crypto and digital assets appeared first on The TRADE.

The platform is an institutional trading venue only and is made up of three units, its OTC electronic platform Fusion, its custodian Fidelity Digital Assets and its diversified liquidity streaming service Diversified Liquidity. The platform is committed to a multi-custody model and TP ICAP confirmed other firms would be onboarded in this capacity in the coming years in line with client demand.

TP ICAP said this segregated model sets it apart from other platforms in this space and will help it to address issues within current crypto asset infrastructure.

“Despite growing demand from our traditional client base, until now the wholesale digital assets market has lacked the credible infrastructure and assurance necessary for them to allocate capital,” said Duncan Trenholme, co-head of digital assets at TP ICAP Group.

“Over time, we believe blockchain will lead to the tokenisation of traditional asset classes. This will result in a more efficient, automated, and risk-mitigated trading and settlement process for financial markets. Fusion Digital Assets positions us well to grasp the opportunities that this change will bring.”

The platform has received backing from several market makers in the lead up to its regulatory approval including Susquehanna, Virtu Financial, Flow Traders, Hudson River Trading and Jane Street.  

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