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Coalition Greenwich Webinar: The Evolving Infrastructure of Institutional Crypto Trading

Coalition Greenwich Webinar: The Evolving Infrastructure of Institutional Crypto Trading


Crypto Trading Set for Bigger Institutional Play as Infrastructure Evolves

Institutional participation in crypto trading is gaining traction, with 52% of institutions across Asia, Europe and the U.S. investing in digital assets, according to a recent Coalition Greenwich study.

As the market infrastructure across the trading cycle matures from a generalist to a specialist model, however, one thing is clear: Institutional investors are not just looking at investing in digital assets, but also focusing on how the technology powering crypto will change traditional finance.

That was the view shared by panellists at the July 20, 2021 webinar on the “Evolving Infrastructure of Institutional Crypto Trading” hosted by Coalition Greenwich, and anchored by Kevin McPartland, Head of Market Structure and Technology Research.

Institutional Participation Growing 
According to Chris Zuehlke, Partner and Global Head of Cumberland DRW (the crypto asset arm of principal trading firm, DRW, and a leading liquidity provider), institutional investors are looking at crypto because of volatility of the asset class as well as the transformative impact it can have on existing financial markets.

He stresses technology: “The most meaningful impact currently is in the decentralized finance (DeFi) space and what decentralization at scale can mean for traditional markets. Often, it’s more about the technology and operations that are being built, as opposed to the trading opportunity that might exist today.”

Chris Zuehlke certainly has the lay of the land here, having worked on the development of several new markets during his 17 years at DRW, starting with the shift of the derivatives markets from the pits to the screen in 2004, to crypto trading with Cumberland in 2014. Sure enough, the footprint is widening. And it’s not just investment firms and corporate banks that are entering crypto trading. Vishal Gupta, Head of Exchange, Coinbase, says traditional finance institutions along with garage start-ups are also looking to make markets, as the entry bar is much lower than in traditional U.S. equity markets.

His journey into the space took “a hard left” from traditional finance from the electronic trading desk at Goldman Sachs to fintech, and then to crypto trading at Circle, where he worked on launching the Ethereum-based USD stablecoin. At Coinbase, he says, “Our focus is to ensure access is as easy as possible to make sure that a deep pool of liquidity is available to takers on the institutional side.”

Travis Schwab, CEO of trade surveillance and transaction monitoring regtech firm, Eventus, was introduced to crypto at a proprietary trading firm in 2011. He has also seen crypto trading from the sell side swell over the past 12 months.

“We are seeing prime brokers and other providers investigating this space from structural, technology and regulatory standpoints to figure out how to bring this asset class into their existing infrastructure,” he says.

Eventus entered the crypto space over three years ago, when it leveraged its traditional market experience to deploy trade-surveillance programs at a crypto exchange. Since then, it has grown to offer these at several crypto exchanges around the world.

Infrastructure in Infancy but Evolving Fast
Institutional interest in crypto trading is being supported by the evolution of the market structure over the past few years. Says Travis Schwab, “The infrastructure is still in its infancy. But, across the board—from idea generation through the lifecycle of trading activity, clearing, custody, and financing—a number of seasoned companies are providing institutional-grade capabilities.”

Adds Vishal Gupta, “Crypto grew up with the brokerage, exchange and  custody services all clumped together as one thing. We’re seeing an evolution, with some of these pieces being pulled apart. So, you have liquidity services and an exchange separating out, or custody services and lending becoming their own businesses.”

According to Chris Zuehlke, as the market becomes more institutionalized, the focus is shifting on resolving novel, crypto-specific problems, such as on-chain analytics for anti-money laundering. Crypto-trading infrastructure, though, is still in “the first or second innings” of a baseball game. “Part of the reason is that people are just starting to plant their flags around the specialization model. And, we’re still awaiting regulatory clarity.”

Traditional Meets Crypto
Does this present an opportunity to build afresh, or will participants cut and paste structures from traditional finance?

Chris Zuehlke contends, “The concept of following coins through the Blockchain does not exist in traditional finance, so you can’t take what you did in euro-dollar futures and apply it to Bitcoin. You have to supplement traditional market skill sets with new capabilities and systems. The good news is that the market is figuring these out.”

Vishal Gupta believes that blockchain technology is prompting all markets to look afresh at legacy systems. He observes, “I don’t think this is like crypto becoming Finance 1.0. I think crypto is taking over the world. We’re seeing institutional firms ask questions like: Why do I have T+2 clearing for equity? Or: Why don’t I just trade it in crypto format? That’s the evolution that’s making me excited for the future.”

After all, adds Travis Schwab, “It’s nice to try and find modern solutions to some of the market and data structure problems that still plague chunks of the traditional industry.”

As for addressing institutional investor nervousness, he says, “Paradoxically, there has never been an asset class that has more transparency built into it than crypto. Yet, there is reluctance on the institutional-investor side. I think some of the tools [such as on-chain analytics and trade surveillance] that constituents of the ecosystem are adopting should allow institutions to feel comfortable with the infrastructure that’s being developed.”

As Chris Zuehlke points to the difference between on-chain and off-chain or omnibus account transactions, Travis Schwab notes the data challenges that crypto faces. “Blending these two together to get a complete picture still needs some work. But that complete picture doesn’t even come close to existing in the traditional asset classes,” says Travis Schwab.

The Road Ahead 
So, how will the crypto market play out three years from now?

Chris Zuehlke believes the markets will follow two concurrent paths: “The first will be the adoption of crypto assets into traditional financial infrastructure. At the same time, you’ll see the financial industry cherry-pick and leverage innovations from crypto to do totally new things, like DeFi. I don’t think you can ignore the ramifications of disintermediation at scale.”

Vishal Gupta adds: “We’re seeing a natural evolution from Finance 1.0 to the next version of finance. Some of the projects underway are going to change the way we think about dollars and equity, and tokenization. There’s going to be a push toward tokenization of everything over time.”

However, Travis Schwab cautions that the change may take longer than expected: “A lot of existing market structures are efficient and probably don’t need a lot of innovation. Also, regulators don’t work very quickly, in general. People’s money is at stake. Three years on, there might still be a ton of regulatory uncertainty, which will be a natural dampener on all these innovations. It’s a very exciting space, but it never moves as fast as you think it should.”