Cryptocurrencies continue to face considerable counterparty and exchange risk, which threatens to turn away larger institutional investors from the market – and industry participants say more should be done to bridge the infrastructure gap between digital and traditional assets.
The second panel of this year’s DigitalAssetsLIVE summit explored how the trading and custody mechanics of the digital assets industry need to evolve amid its ongoing drive towards institutionalisation.
Cryptocurrencies now operate 24/7 which, while exciting, also represents a whole new different range of challenges, observed panel moderator Michelle Bond, CEO of the Association for Digital Asset Markets, the cryptocurrency industry trade body.
George Zarya, founder, CEO and head of sales, Bequant, noted that the arrival of more institutional-type participants in crypto has flagged up a niche for intermediaries. Markets have changed “dramatically” in the past three years, he explained, adding his firm is among the first to be regulated as a prime broker and exchange.
“When we started, the hot topic at the time was about decentralisation and eliminating intermediaries. But in institutional space the trend is somewhat different,” he explained. “We saw the need for an intermediary that could provide value-added services and bring a familiar model of operation from the traditional space into what at the time was a ‘wild west’ market.”
The panel also heard how regulation has rapidly risen to become “paramount” among institutional investors, with speakers flagging governance, security and infrastructure concerns raised by clients. Panellists described how the management of digital assets is “very different” from the way traditional assets are managed, with technology and cybersecurity creating a whole new spectrum of operational challenges for managers and investors alike.
To overcome concerns held by large institutional investors and funds of funds, operating through a regulated platform is “critical”, according to Paul Frost-Smith, CEO of Argentium Digital Asset Management, a systematic, high frequency arbitrage-focused crypto hedge fund.
“We operate through a regulated platform and we think others should as well,” Frost-Smith told the session. “We’ve targeted our strategies very much towards market neutral rather than beta chasing. That is something that goes down well with the institutional community.”
He added: “It’s not difficult to get beta exposure to this market. But if you have something which exploits volatility, and is able to arb within the market, you win a lot more friends than if you are simply beta-chasing in one form or another.”
Speakers also underlined the importance of “bridging the gap” between the crypto space and traditional markets with regards to infrastructure and improving standards, and discussed the development and evolution of crypto exchanges. The session weighed up how exchange counterparty risk and so-called “hot wallets” are colouring allocator views.
“Every investor we speak to, they may love our team and believe our algos will do what we say they will do, but what they are really worried about is suffering a hacking or having some problem with an exchange going down,” Frost-Smith noted.
Asen Kostadinov, head of strategy at Copper.co, remains confident that many of the risks confronting crypto will be tackled, and pointed to “enormous” progress in several areas.
“The simple fact is that unless you are able to control some of these risks you are not going to be able to address the majority of the institutional investor base out there,” Kostadinov said.