From Bitcoin to NFTs, why institutions are adopting crypto

From Bitcoin to NFTs, why institutions are adopting crypto

Opinion

Alternative Lending

Digital Banking

Savings and Investment

Cryptocurrencies are increasingly becoming an accepted part of the financial landscape with institutions now realising they must adopt them, writes Ivan Soto-Wright

Image source: Photo by Oleg Magni from Pexels

The global perception of cryptocurrency has shifted dramatically in recent years — once being seen as a fringe investment class, they are now known for having a multitude of use cases including in low-cost remittances, peer-to-peer lending, and high interest savings accounts.

With cryptocurrencies increasingly becoming an accepted part of the financial landscape, institutions are realising they must adopt this young asset-class, or risk losing relevance. Broadly speaking, I believe the reason for increased adoption amongst businesses can be split into the following three camps.

Surge in consumer popularity and understanding

Until very recently, only those with a strong understanding of the underlying technology felt comfortable participating in crypto in any meaningful way. However, as functionality and awareness has grown, so too has adoption and, in many instances, value.

This came to a climax last year, when — against the backdrop of macroeconomic uncertainty — Bitcoin’s explosive rise in price drew an enormous amount of attention from the press and public, making the year something of an inflection point in terms of global interest.

The recent surge in consumer interest can also be credited to prominent public figures endorsing cryptocurrencies, as well as firms such as Mastercard, Tesla and JP Morgan, all of whom have signalled strong interest in the space. Last month, Mastercard announced that it will “start supporting select cryptocurrencies” and create “more opportunities for shoppers and merchants…to transact in an entirely new form of payment.”

Around the same time, Tesla also announced that it will soon accept Bitcoin as payment (shortly after adding $1.5bn worth of BTC to its treasury). Naturally, these were widely viewed as endorsements for the idea that this emerging asset class will play a major part in disrupting the traditional financial system.

This heightened awareness has led to a surge in interest which, in turn, has put pressure on businesses to offer services allowing their users access to crypto.

Say if a consumer is looking for a new bank account – all other things being equal, are they going to choose the option that offers crypto exposure, or the one without? While not everyone will immediately want to explore the crypto space, we’re increasingly seeing that products and services that incorporate crypto are more attractive to consumers.

A focus on security and speed

One of the major benefits of blockchain technology is its ability to enforce systemic transparency, making it very difficult for fraud to go undetected. The open and decentralised nature of public blockchains means that transactions are tracked from start to finish, network-wide, removing any doubt around the provenance of funds, as well as removing the need for an intermediary. Additionally, chargebacks are technically impossible, as all transactions are final and immutable.

A key pain point for businesses operating within the traditional financial system is that money transfers typically take hours or days, are labour-intensive, and expensive. Blockchain technology can cut transaction times from days to seconds, and fees from dollars or even hundreds of dollars to fractions of a cent

For businesses in the financial services space, speed and safety are both paramount — yet they don’t often go hand-in-hand. For an industry that largely relies on outdated, slow and clunky legacy systems, the infrastructure that MoonPay and others offer can be a game-changer. Speed and costs can be lowered without compromises in security, all to the benefit of their users.

Access to emerging markets and trends

Given most cryptocurrencies are hosted on decentralised ledgers, users don’t need a traditional bank account to be able to access or engage with them — access is open. Many perhaps don’t see this as an important differentiation point in more developed economies like the U.K or U.S. where banking access is prevalent, but the reality is that an estimated 1.7 billion people are classed as ‘unbanked’ worldwide and don’t have the opportunities that we are so fortunate to have.

Crypto is fundamentally open and accessible, and as it becomes more mainstream, businesses can begin to offer much-needed services to markets that have previously been out of reach.

But crypto is more than just a way for businesses to enter new markets it also allows them to future-proof their offerings and increases agility in catering to emerging consumer trends. Recently, a number of entirely new types of marketplaces have emerged – a prime example being NFTs.

NFTs (non-fungible tokens) act as a digital certificate of ownership for any digital asset, such as a Tweet, piece of artwork, or an album, and have very quickly become something resembling a mainstream financial product. Businesses are already starting to cater to this surge in interest in the NFT space.

Taco Bell, for example, just had tremendous success with its ‘NFTacoBell’ collection of taco gifs, with prices reaching more than $3,600 per gif.In the art space, the first digital-only art auction by Christie’s sold its first digital piece of artwork for £50m — people are seeing real value in these digital products. Businesses that have been quick to integrate crypto offerings into their platforms have seen significant surges in revenue, while those that have been slower to adopt may, to some degree, be falling behind.

We’re on the precipice of a new financial age where crypto is a central pillar.

Businesses, large and small, have already started to embrace this new technology, engage with new markets, serve the needs of changing consumer mindsets and ultimately become more profitable. As is always the way, those who are slow on the uptake risk missing out in the long term.

Crypto CFD challenges: Liquidity, counterparty risk, regulation

Crypto CFD challenges: Liquidity, counterparty risk, regulation

“Deliverable crypto is a different matter. When crypto exchanges start being regulated and offering reliable connectivity, brokers still have to make sure that their aggregation software is able to handle cryptos and their infrastructure can ensure timely delivery. Moreover, counterparty risk remains much higher than with a regular forex LP”, said Ms. Zakharova.

Providing liquidity is no easy function to achieve. It requires a combination of capital, technology, and established institutional relationships for successful delivery.

When it comes to crypto CFDs, it means bringing an emergent asset class to the world of contracts for difference products. The challenge became feasible in 2017 as the crypto ecosystem matured to the point even CME Group launched the first Bitcoin futures contract.

FinanceFeeds spoke to Natalia Zakharova, Head of Business Development at FXOpen, a global company that has regulatory licenses in Australia, in the UK, and European jurisdictions, to ascertain her view on the challenges of crypto CFD liquidity aggregation and delivery.

“If we speak about crypto CFDs, I don’t see why liquidity aggregation should be any different than forex. It might have been an issue back in 2017 when crypto CFDs were new, liquidity was thin and demand was huge. These days there is a choice of reputable LPs offering consistent pricing and execution.

“Deliverable crypto is a different matter. When crypto exchanges start being regulated and offering reliable connectivity, brokers still have to make sure that their aggregation software is able to handle cryptos and their infrastructure can ensure timely delivery. Moreover, counterparty risk remains much higher than with a regular forex LP”, said Ms. Zakharova.

Indeed, a number of established prime brokers have launched their crypto CFD offerings, including CMC Markets Connect, Advanced Markets, and B2Broker.

These companies have developed unique products, minding the spread competitiveness, minimal slippage, leverage, and most importantly, market depth with an ever-expanding crypto CFD liquidity pool as the institutional players join the party.

A solid crypto prime CFD solution that ensures the deepest liquidity pool will should aggregate cryptocurrency exchanges and brokers, non-bank liquidity providers, OTC orders of institutional clients, hedge funds, and client-broker orders.

In regard to counterparty risk mentioned by Ms. Zakharova, the irony is that Bitcoin was created with the intent of eliminating counterparty risk with its decentralized and open blockchains.

But when Bitcoin users hand their Bitcoin over to a custodian such as a cryptocurrency exchange, counterparty risk is reintroduced into the system. News that established names such as Goldman Sachs are preparing their crypto custody services are likely to inspire greater confidence in the leveling of the playing field.

Will Crypto CFDs be around for long?

While the industry quickly adapts to the digital asset class, so are the financial watchdogs across the globe, namely the top jurisdictions for CFD trading.

The UK Financial Conduct Authority has imposed a ban on crypto CFD products for retail traders. The ban announcement was issued on 6 October 2020 and retail brokers started to enforce the new restriction on 6 January 2021. The total ban will take effect on 25 March 2021.

“The FCA considers these products to be ill-suited for retail consumers due to the harm they pose. These products cannot be reliably valued by retail consumers because of the:

inherent nature of the underlying assets, which means they have no reliable basis for valuation

prevalence of market abuse and financial crime in the secondary market (eg cyber theft)

extreme volatility in cryptoasset price movements

inadequate understanding of cryptoassets by retail consumers

lack of legitimate investment need for retail consumers to invest in these products

These features mean retail consumers might suffer harm from sudden and unexpected losses if they invest in these products.”

The regulator stated that retail consumers are estimated to save around £53m from the ban on these products.

FXOpen was one of the first FX and CFD brokerages to offer crypto trading pairs, with currently more than 40 cryptocurrency markets in its offering, including Ripple (XRP) which is currently ‘fighting for its life’ amid the SEC vs Ripple lawsuit we have been covering. The SEC claims XRP is a security that was sold in coin offerings. Ripple responded that it never held an ICO. Wherever the case may take us, it is likely to establish a meaningful precedent.

FXOpen announced the closure of all crypto CFD positions for UK retail clients by January 5. Professional clients are exempt from the ban in the UK and FXOpen maintains its crypto CFD offering for customers across the globe.

In the aftermath of the UK ban on crypto CFDs, the trading industry eyes other regulators alike to get a clearer view of what is ahead.

Although the UK is now out of the European Union, ESMA may regard the FCA’s move as an example for its future policy. Australia did draw inspiration from Europe for its restrictions on CFD products coming into effect later this month.

Crypto infrastructure provider Fireblocks raises $133 million – TechCrunch

Fireblocks has raised a $133 million Series C funding round led by Coatue, Ribbit, and Stripes. The company provides several products that let you store, transfer and issue digital assets. In particular, Fireblocks provides custody to institutional investors — it currently stores $400 billion in cryptocurrencies.

BNY and Silicon Valley Bank are also participating in today’s funding round. Existing investors Paradigm, Galaxy Digital, Swisscom Ventures, Tenaya Capital and Cyberstarts Ventures are investing once again.

Overall, Fireblocks has raised $179 million since day one. The company says it has yet to reach a valuation of $1 billion — it isn’t a unicorn yet, but not far from it.

The startup doesn’t have a consumer-facing product. Instead, it sells its products to banks, fintech startups and other financial institutions. As interest rates have been close to 0% for a while, financial institutions are looking for a solution to store cryptocurrencies and diversify their balance sheet.

Fireblocks lets them do that securely. The company uses multi-party computation to handle private keys. When you create a wallet, cryptographic secrets are generated on your device and on the servers. Whenever you’re trying to initiate a transaction, multiple secrets are used to generate a full public and private key. This way, there’s no single point of failure.

The company has also put together a network of liquidity partners. You can connect directly with 30 different exchanges and initiate transfers from there. That’s why over-the-counter trading desks and market makers also use Fireblocks to settle trades across several exchanges.

Fireblocks also lets you issue and manage tokens. It can be particularly useful if you want to issue stablecoins, tokens that are backed by fiat currencies and don’t fluctuate over time against their fiat value. It works across multiple blockchains as well.

You can earn staking rewards on Ethereum 2.0, Polkadot and Tezos through integrations with Staked or Blockdaemon. There’s a DeFi API so that you can take advantage of the most interesting DeFi protocols.

The company also integrates with compliance providers Elliptic and Chainalysis for anti-money laundering reasons. The company can flag and reject transactions depending on a set of rules.

As you can see, Fireblocks provides plenty of integrations with the crypto ecosystem at large. Starting from scratch and building those integrations in house would require a ton of resources, especially if cryptocurrencies aren’t the core element of your business.

In many ways, Fireblocks reminds me of banking-as-a-service companies, except that Fireblocks focuses on crypto assets. And today’s funding round proves once again that there are a lot of investments happening in the crypto industry right now. PayPal acquired Curv just a couple of weeks ago. And this acquisition is certainly helping other crypto infrastructure companies proving that they’re valuable.