As ErisX develops a robust, secure and regulated platform for digital assets, we have been getting a lot of inquires about institutional investors. Is there still an interest from this segment? Recent headlines may leave room for doubt. For example, we have seen Coinbase reverse course with Instinet’s former CEO Jonathan Kellner, as the company’s head of institutional coverage, because [the company], “thought it was right to refocus its efforts on its retail business and hedge fund services rather than broader institutional focused products.” Other news included the departure of global head of institutional markets, Jamie Selway, from Blockchain after about six months, because “the [institutional] segment has been slower to develop while the needs of professional investors has grown over the last year.” More recent senior institutional business development exits at CoinList and Coinbase have continued the string of headlines eroding confidence in forthcoming institutional participation.
While these headlines may leave the impression that institutional interest is dwindling, we believe it is more a sign that the institutional business is hard. Firms that sought to target institutions may now be getting the full picture of what is necessary to operate in a highly regulated market at the standards, and with service offerings, required by institutions. They may be concluding that it is harder, more demanding, and more expensive than anticipated. It is one thing to say “we’re institutional grade,” it is completely another to run the gauntlet of the standard New Product Committee and satisfy the approval of legal, regulatory, compliance, operations, risk, and business signatories at a typical institution. As a counterweight to these headlines ErisX has announced significant additions to our team, including our senior leadership, of capital markets professionals from exchange, clearing, banking, electronic trading, blockchain and digital asset backgrounds and we continue to hire.
In our view institutional interest is, in fact, growing, but in more subtle and fundamental ways than a blunt tsunami of trading capital that many, particularly those that are less familiar with the institutional landscape, have hoped for and predicted. Below we point out some of the signs we see that the market is growing and maturing in a way that the institutional players expect, recognize, and need, to get involved. As such, despite claims to the contrary, institutional interest is not dead.
Support from Institutional Players
First, we need to be more precise in our definitions of “institution” and “participation.” If we define “institutional participation” to include institutional intermediaries, we see increasingly large, well-known institutions entering, investing, and building capabilities in this space. Some prominent examples include our investors. Late last year we announced our Series B financing round with backing from a wide range of investors in the institutional and trading space. These firms represent important segments of the market covering trading infrastructure, distribution, and liquidity supply and demand — all fundamental components to a more robust, mature, and well-functioning market. With the addition of industrial institutions, our investors round out a diverse group of institutional participants from the digital and traditional financial industries. With concrete support from authoritative institutional players, we believe that the necessary networks are developing around ErisX to enable participation from institutional asset managers that represent large pools of investment capital and trading flows.
Breaking Down Entry Barriers
Last year our Chief Strategy Officer Matt Trudeau attended the Crypto Evolved conference organized by ViableMkts. The focus of the event was the institutionalization of the crypto markets. Three prominent themes emerged during the course of the event including the need for
- A robust, high-performance, (unconflicted) exchange/trading infrastructure
- Proper, secure custodial solutions and
- Greater regulatory clarity
These were three challenges presented by “Crypto 2018” to “Crypto 2019.” ErisX will respond to the exchange and custody challenges with the launch of our spot and futures exchange and clearinghouse this year, and our view is that there is reasonably good clarity within the market segments that fall under the jurisdiction of the Commodity Futures Trading Commission (CFTC). Further, we believe the open dialogue between the CFTC and the industry helps continue to refine regulatory guidelines and create clarity for the space to confidently and compliantly evolve. We also look forward to further clarity and guidance from the Securities and Exchange Commission (SEC) relating to segments that fall under its jurisdiction, which will create new and exciting opportunities while protecting investors and rooting out frauds, scams, and ineptitude.
Next, some of the more forward-looking institutions, as defined by asset managers, global banks, trading firms, and infrastructure providers have made great strides in commercializing blockchain technology and digital assets. These institutions, the classic “early adopters”, are becoming increasingly sophisticated and discerning in their understanding of the technologies’ capabilities through study and experimentation. Much of this has been happening methodically and rigorously in the background. They have begun to identify appropriate applications, of the appropriate technologies, for relevant use cases, and they are developing necessary operational capabilities, including robust policies and procedures, as they move from proof-of-concept to production. For people that historically embraced the fast, seat-of-the-pants character of the early years in the space, these developments may seem staid, boring, or even intimidating (particularly for those who struggle to rise to a new standard). However, for markets professionals, these are the most exciting signs yet of the developing durability and longevity of the space, and the fundamental underpinnings of institutional adoption. This is the bridge to the “late majority” where things begin to get really interesting.
The Coming Upgrade
As the market began to grow, forward-looking trading firms like Hehmeyer Trading + Investments launched a cryptocurrency trading desk and global quantitative trading firm Susquehanna Investment Group brought with them the technical, trading and operational sophistication of professionals. As more professional trading firms join the market their needs and expectations around trading infrastructure vendors are driving existing players to improve, and drawing additional professionals into the market.
In addition banks, brokers, exchanges and asset managers are looking at how traditional assets and markets can migrate to new technologies and make use of their new capabilities. We believe that much of the education in recent years is starting to produce results and tools are being developed to make it easier for institutions that did not acquire the expertise to participate in the space in its early years, to join and participate as it evolves in coming years. The underlying technology is becoming more mature, innovation continues at a furious pace, and many of the largest shortcomings of and objections to the technology are being resolved or at least demonstrating visible progress — security, scalability, performance, to name a few.
As we build a spot and regulated futures platform for digital assets, we have to look no further than our investors, and our team, for proof that institutional interest in the digital asset space is alive and well. We are bringing to market a solution that will address the standards and requirements of institutional players and we see moves by traditional institutional players that demonstrate an embrace and understanding of this new technology. While institutional adoption may be happening at a slower rate than some anticipated, or taking a shape that is different from what some may have expected, it is happening in a way that the institutional market needs and recognizes.
We want to leave you with a comparison between blockchain technology and the electric motor. While electricity was initially deployed in factories to replace steam, it was the factories that eventually had to be redesigned around the unique capabilities of the electric motor before its full potential was realized. Before productivity gains were realized some [institutions] chose to stick with steam. At the time, [one] may have been tempted to conclude that institutional interest in electric motors was dwindling. To take advantage of electricity, factory owners had to, “think in a very different way.”
We believe that the market structure for traditional assets will evolve and benefit from adopting certain blockchain/crypto capabilities, and that the emerging digital asset market structure will benefit from adopting some of the hard earned knowledge and wisdom from traditional assets. Institutions’ initial efforts may have been trying to figure out how to replace legacy “steam” systems with blockchain-based systems. As institutions increasingly “think in a very different way” about blockchain technology and digital assets, their participation will become even greater and more fundamental. No, institutional interest in the digital markets is absolutely not dead. In fact we believe it has just found its legs.