DIGITAL CURRENCIES Institutional digital assets: What are the evolutionary lessons from e-FX? “In our case we are focusing on the Gulf Cooperation Council countries, where we find regulators very welcoming and open to business,” risk management solutions will also help deliver the requisite stability to an institutional digital asset marketplace. HFT AND MICROSTRUCTURE Some institutional market makers are already active in digital assets, typically the same names already prominent in FX. “They already have excellent technology, which is key to their profitability, but they will still need prime brokers because they can’t have trading lines with everybody,” says Sanjay Madgavkar. Nevertheless, the growth of HFT activity generally will be influenced by various factors, including regulatory oversight, market structure, data quality, and platform security. Some see regulation and analytics having a major influence. “Regulators may impose stricter rules on HFT, and market participants will need to adapt their strategies to new liquidity pools and market structures,” says Vinay Trivedi. “Access to high-quality data and analytics will also be essential if participants are to be able to monitor and maintain profitability.” Lars Holst A related question is how market microstructure will evolve. At present, it seems probable that it will diversify across OTC and listed venues, plus new platforms catering for specific market segments. However, one reaction to CEFI failures has been growing trading activity on DEFI and P2P networks, which might potentially result in a fragmented market structure. This is not necessarily an insuperable problem if aggregators and SOR providers are able to provide seamless order book access across CEFI and DEFI. GROWTH YES, BUT WHERE? Rapid growth in the market for institutional digital assets is seen as a given by many participants. “I think we could see huge growth in institutional activity over the next three years, because everybody wants a new asset class to be exposed to, especially as some of the correlations break down,” says Sanjay Madgavkar. “At present, digital assets seem strongly correlated with a “risk on” environment, but ultimately they could become more of a safe haven - especially if inflation continues to rise and there is more government fiscal and monetary uncertainty.” However, where that growth will concentrate geographically remains an intriguing question. Regulation again appears a strong factor, with many commentators drawing parallels with how regulators have influenced the growth of retail FX trading. Some have found the geography of their business model heavily influenced by the attitude of regulators. “In our case we are focusing on the Gulf Cooperation Council countries, where we find regulators very welcoming and open to business,” says Lars Holst. “For us, Dubai is the hub to south-east Asia and Africa, plus we can hire the necessary talent there. Longer term I definitely think we will see strong growth in Asia.” Various fundamental factors are seen as key to Asia’s growth potential for institutional digital assets. These include a tech-savvy population, an established financial industry, and supportive regulatory and governmental environments. This is one reason some do not see digital assets following the same geographic maturity cycle as FX. “APAC is taking a lead over some major developed markets,” says Vinay Trivedi. “This is reflected in broad user adoption, plus new blockchain and tokenization-based use-cases, new ventures, and traded volumes.” CONCLUSION: LESSONS TO LEARN The institutional market for digital assets has the opportunity to learn from the mistakes and challenges of both institutional FX and retail digital assets. Robust risk management and settlement procedures, plus the development of scalable solid trading infrastructure are obvious examples. With necessary adaptation, much of the technology - such as cloud - that is increasingly used in institutional e-FX can be (and is being) redeployed. Elsewhere, best market practices (such as the FX Code of Conduct) can also be imported to improve trust and reduce friction. However, institutional interest in Digital Assets will also drive the need for significant changes to something that does not have a counterpart in the FX market – the blockchain. Higher capacity and lower cost blockchain technology will be required to support institutional activity generally, but also to facilitate innovation such as the use of smart contracts to support bilateral trading. 62 MAY 20<strong>23</strong> e-FOREX
MAY 20<strong>23</strong> e-FOREX 63