Common sense needed for future of cryptocurrency trading, say experts

Industry experts at this year’s TradeTech Paris conference agree: increased transactions speeds are needed so real use cases for blockchain can be developed, similar to the evolution of the Internet.

By Charles Hayter, CEO, CryptoCompare

Industry appetite has grown as cryptocurrency markets have matured, however sticking points still need to be addressed with transaction speeds topping the list, so that everyday use cases for the nascent technology can really take off.

Speakers taking part in a panel discussion on the institutionalisation of cryptocurrencies at this year’s TradeTech conference in Paris outlined how far industry had come since the embryonic years in 2011 when cryptocurrency business were denied a bank account by top institutions, and its progression to the partial institutional offering that is seen today.

The panellists, included Tan T-Kiang, chief investment officer of Grasshopper, Gerrit van Wingerden, CTO of Caspian, and Miha Grčar, head of business development at Bitstamp.

The speakers predicted that institutions will become more involved in the space in as soon as a year’s time, dependant on the industry addressing a few important factors including banking, licencing, reporting, custody, and execution – generally, the overall services that one would expect from a traditional financial markets point of view. They acknowledged that we have seen an overall trend towards the maturation of the industry over the past few years, with the institutional side moving much slower than the retail sector market due to its more sophisticated needs, however this trend was being reinforced year after year.

The panellists agreed that some sticking points still remain in terms of trading at an institutional level, including:

  • Custody solutions: Eighteen months ago, custody was provided by either an exchange custodian or secured on a proprietary ledger hardware wallet. Today, many solid players have come into the space providing very good institutional offerings and it was hoped that this would only improve;
  • Exchange matching engines: The industry is still seeing a lag in terms of the quality of exchange matching engines as very few exchanges can handle extremely high order volumes;
  • Standard APIs: There is currently a lack of standard of APIs with only a handful of exchanges offering FIX connectivity. Even when FIX is available, it is not possible to connect because the FIX implementation is simply lacking in functionality, for example, in terms of documentation recovery and the ability to view unsolicited orders (critical when a trader needs to see an entire position);
  • Security: Large organisations need to think about efficiently and safely processing the storage of security keys and 24-word recovery passphrases for a multitude of wallets;
  • Clearing and settlement: When moving positions between exchanges it can take up to a few days, and even over a week during times of increased volumes. While most operations have been automated in traditional markets, additional operations teams need to be deployed to operate crypto books;
  • Skills gap: The art of trading still applies to cryptocurrencies, but a deeper understanding of crypto is needed when a particular event happens, for example, a bitcoin fork. Traders need to have an understanding of the structures and the resultant effects on the ecosystem.

Tipping point

Looking ahead to a potential tipping point for institutional adoption of cryptocurrency trading, a number of different perspectives were put forward. Firstly, the speed of blockchain transactions needs to dramatically improve. The oft-repeated analogy of the Internet in the early 1990s was used, in that the slow connection at that time meant that it was thought the technology was only suited for sending emails, rather than internet shopping or contactless payment facilities that we use it for today.  Blockchain technology needs these real use cases to be put in play in order for it to properly take off.

From a trading perspective, institutional trading will more likely increase when settlement occurs along the model of a prime broker, in terms of the ability to net decisions across many exchanges, the establishment of proper custodians, and settlement cycles that can cooperate operationally and reduce settlement times down to D+3.

Capacity to scale, scalability initiatives for the Ethereum blockchain, and the development of the STO market were all mentioned as developments to watch in the crypto space. Standardised market data was also emphasised as necessary for traders so that true figures of trading on a particular exchange could be deciphered and market manipulation weeded out. It was flagged, however, that redistribution rights of market data is a concern, with a need to avoid the extremely high vendor record fees that are prevalent in traditional markets today. Moreover, the permissionless decentralised nature of blockchain technology translates into the ability of crypto currency exchanges to trade 24/7. This is one area that may spill over into traditional markets, which could involve completely rewriting approaches on how technology infrastructure is built and made.

Common sensibility

Practitioners in the crypto space basically need to reinvent processes in a way that puts their clients’ interests first, as well as setting the regulators at ease over issues that are particular to cryptocurrencies, such as the occurrence of forks. In general, the mainstream of the crypto industry are ensuring that they follow certain principles, such as compliance with current European and US regulations with regards to securities and AML/KYC practices. The panellists concluded that in order to successfully progress in this exciting new space, players need to uphold good practice in terms of transparency and openness, as well as applying a good dosage of common sense.