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Diving Into Cryptocurrencies: Trading Stack, Standardization Beckon Institutions at FIX Briefing

Traders Magazine Online News, April 18, 2018

John D'Antona Jr.

From mining to physical trading to futures, speakers at this spring’s FIX Trading Community Americas Briefing made it clear: cryptocurrencies—and the consequences they augur—are top of mind, with planning around them now on tap even at financial services’ most staid and steadfast firms.

The briefing, hosted last week by Goldman Sachs in New York, narrowed in on a range of ongoing topics for FIX members—from fixed income electronification to better pre-trade transaction cost analysis (TCA) and an assessment of MiFID II’s infamous onset in January. But the session on cryptocurrencies attracted special attention. The digital assets having grown in stature from sideshow curiosity to piqued interest after the December 2017 explosion in Bitcoin’s price (BTC), and its subsequent softening since.

Perhaps the most remarkable takeaway was the widening variety of touchpoints that investment banks, asset managers and technology providers have begun to assess—whether offering BTC futures (already available) and exchange-traded funds (in the works, or under appeal with the SEC); building out institutional-grade venues and robust infrastructure to facilitate physical trading; efforts at influencing the evolution of mining and walleting of coins; or more seamless integration for crypto holdings into investors’ portfolio management. All of this also came without much mention of blockchain—the darling distributed ledger technology underpinning cryptocurrencies—other than to reassure that interest in BTC investing does not require blockchain expertise. Quite a change, indeed.

Still, caution carries the day. When polled, 73 percent of the audience admitted they either owned no crypto, or were still looking for the right opportunity. The panelists were similarly mixed with some heavily invested, others recently selling theirs, and one jokingly adhering to the acronym ‘HODL’—or hold, as it is known in Silicon Valley.

Pushing Forward

So, why the disparity? The panel—with participants ranging from Fidelity and Goldman to CBOE to startups—first pointed to a key missing driver: an affirmative stance from US regulators. That is particularly true compared to the legitimacy crypto has been given in Asian jurisdictions like Japan and South Korea, they said. Pulling in more investors starts with clarifying with which regulator among the Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) should take the lead—and perhaps accepting that it is neither a cleanly-defined security nor a commodity—and building a regulatory framework from there. That would further ward off associations with North Korea and initial coin offering (ICO) fraudulence, too.

Institutions also require stronger confidence in the crypto trading landscape. As one speaker said, the fear is that institutional activities—BTC market-makers’ hedging, for instance—can’t be properly completed when access to the physical temporarily goes dark. “We sometimes lose sight of the fact that this is the first asset class ever that really began with retail, and as a result, the venues are really just simple central limit order books, not full-fledged exchanges,” said another. “As we saw in December with volumes running wild, those venues fall down when put under stress. That experience has helped refocus the industry back to walking first, before running.”

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