TradingTech Insight report addresses digital asset challenges and potential

The report looks at blockchain technology, institutional interest, and data.

A report by TradingTech Insight focuses on the institutional interest in digital assets, stressing the transformational potential of DeFi. It gives a positive outlook, saying a framework for regulatory oversight and infrastructure that financial institutions can use that meets their fiduciary requirements has been lacking so far, but is now being developed.

Data is crucial

The market cap of digital assets is currently over $1trn and extends far beyond bitcoin. “There are many questions that financial institutions need to answer related to research, trading, risk, analytics, reporting, and compliance to enter and succeed in the digital asset class. And to answer those questions, they need both fundamental (on-chain) and market data,” Shawn Douglass, CEO of Amberdata, says.

There is a lack of data standardization across the industry. Global organizations such as the Association of National Numbering Agencies (ANNA), International Standards Organisation (ISO), and Financial Information eXchange (FIX), are working on this. ISO’s Digital Token Identifier, for example, is under development. Over 1,300 DTIs had been issued by April this year.

In a recent wide-ranging survey of institutional investors conducted by Fidelity Digital Assets, 52% of firms surveyed globally confirmed that they are currently invested in digital assets, either directly or through alternative investment products, and 90% of respondents said that they found digital assets appealing.

China, El Salvador and China

While acknowledging it’s still too early to see how regulatory oversight will play out, the report says regulators are scrambling to figure out how assets should be classified and where oversight might lie: “At one end of the spectrum is China’s early 2021 clampdown ruling that activities related to cryptocurrencies are illegal. At the other is El Salvador’s move to make bitcoins legal tender. In between, Singapore’s MAS and others are working hard to make their jurisdictions a key player in crypto markets.”

Catering to the nuances of multiple national authorities presents a significant barrier to entry for many institutions, with the result that participation thus far has tended to focus on a small number of regulatory jurisdictions.

What is clear is that to accelerate the adoption of digital assets, regulatory conformity is needed. “Catering to the nuances of multiple national authorities presents a significant barrier to entry for many institutions, with the result that participation thus far has tended to focus on a small number of regulatory jurisdictions.” Standards, trading technology, and post-trade risk systems are all also factors.

“Institutions have begun to recognise that digital assets could play a role in their own capital adequacy compliance activities, by allowing asset owners to unlock the value held in previously difficult-to-value assets,” the report says.

Inherent conflict

“[There is] an inherent conflict between the libertarian decentralised approach to blockchain-based currencies and assets, and the need for a centralised regulatory body to provide governance and enforce the rules when they are breached,” the authors say.

Some 44% of respondents to the Fidelity Digital Assets survey saw the lack of fundamentals to determine the value of digital assets as one of the main barriers to adoption. But despite these setbacks, the outlook is positive. Trading Tech inviseges the following developments:

The embrace of private assets by public markets The market has already witnessed a substantial increase in private issuances (around $1.5 billion in the past 18 months), so observers can expect to see these accelerate. This will be accompanied by the country-by-country adoption of public offerings, particularly as exchanges start to launch new digital markets.

  • The emergence of niches – Institutions are exploring initiatives built on new niche asset types. Candidates include carbon, renewables, infrastructure and real estate. In these instances, digital assets are seen as the key to unlocking liquidity tied up in physical assets, potentially freeing up vast amounts of capital for investment elsewhere.
  • Self-disruption – Large market service providers and utilities like Euroclear, Swift and DTCC are beginning to play out their DLT strategies, and they are likely to bring the rest of the market along with them.
  • New tech – The marketplace has already witnessed the emergence of new exchange systems, OMSs/EMSs, risk management and reporting platforms. Expect to see more activity from incumbents as they begin to assess how the market structure and technology changes will affect them and their clients.
  • Resources – Banks will gear up their regulatory change, business process and compliance areas to address the legal, policy, regulatory and IT change required.

See the full findings of the report.