e-Forex-May-23
DIGITAL CURRENCIES Institutional digital assets: What are the evolutionary lessons from e-FX? A mature market for institutional digital assets is already a matter of when not if. Many are drawing parallels with the evolution of FX but predicting far faster progress. Andy Webb, editor of the Institutional Digital Assets portal, talks to three prominent industry practitioners to gain their insights on how institutional digital assets will evolve. Andy Webb EVOLUTION AND SHAPING FACTORS: MIRRORING FX? Digital assets are already emulating the evolution of FX in the institutional context. Perhaps the main difference is speed, with many commentators expecting the transition to an electronic market for institutional digital assets to be considerably quicker than it was for FX. “For vanilla spot trading of digital assets such as crypto we are already there,” says Lars Holst, CEO and founder of GCEX. “However, for derivative instruments and fractionalisation we may see a period of manual or voice negotiation.” Despite the similarities, an important distinction between digital asset trading and FX is the way that credit and settlement are handled. At present, digital exchange trading is conducted on a pre-fully-funded basis, which is not feasible for long-term sustainable institutional-scale market activity. If an institution wants to trade on ten different venues today, it has to try and predict its notional exposure on each one and pre-fund them all, which is simply untenable. The emergence of specialist credit intermediaries to address this is also potentially problematic, because they are unlikely to want to assume all the operational settlement risk associated with digital assets. Where we see a lot of similarities between the two markets is the role of 58 MAY 2023 e-FOREX
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DIGITAL CURRENCIES<br />
Institutional digital assets:<br />
What are the evolutionary<br />
lessons from e-FX?<br />
A mature market for institutional digital assets is already a matter of when not if. Many are<br />
drawing parallels with the evolution of FX but predicting far faster progress. Andy Webb, editor<br />
of the Institutional Digital Assets portal, talks to three prominent industry practitioners to gain<br />
their insights on how institutional digital assets will evolve.<br />
Andy Webb<br />
EVOLUTION AND SHAPING<br />
FACTORS: MIRRORING FX?<br />
Digital assets are already emulating<br />
the evolution of FX in the institutional<br />
context. Perhaps the main difference<br />
is speed, with many commentators<br />
expecting the transition to an<br />
electronic market for institutional<br />
digital assets to be considerably<br />
quicker than it was for FX. “For<br />
vanilla spot trading of digital assets<br />
such as crypto we are already there,”<br />
says Lars Holst, CEO and founder<br />
of GCEX. “However, for derivative<br />
instruments and fractionalisation we<br />
may see a period of manual or voice<br />
negotiation.”<br />
Despite the similarities, an important<br />
distinction between digital asset<br />
trading and FX is the way that credit<br />
and settlement are handled. At<br />
present, digital exchange trading is<br />
conducted on a pre-fully-funded basis,<br />
which is not feasible for long-term<br />
sustainable institutional-scale market<br />
activity. If an institution wants to<br />
trade on ten different venues today,<br />
it has to try and predict its notional<br />
exposure on each one and pre-fund<br />
them all, which is simply untenable.<br />
The emergence of specialist credit<br />
intermediaries to address this is also<br />
potentially problematic, because they<br />
are unlikely to want to assume all the<br />
operational settlement risk associated<br />
with digital assets.<br />
Where we see a lot of similarities<br />
between the two markets is the role of<br />
58 MAY 20<strong>23</strong> e-FOREX
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