Safety and Security, Comfort and Familiarity May Be Key In Bringing In Institutional Investors
“Ten years after Satoshi Nakamoto publishes his white paper and we have TD Ameritrade and Fidelity talking about bringing crypto to their customers,” said Tim Grant, CEO of DrumG, a fintech company focused on distributed ledger-based applications, at the Futures Industry Association’s (FIA) 34th Annual Expo in Chicago. “Crypto used to be a dirty word but we are all breathing a sigh of relief now that we can talk about it.”
In fact, it was cryptocurrencies (aka digital assets), blockchain and distributed ledger technologies (DLT) that dominated conversations at this year’s gathering of derivatives industry participants, exchange leaders, regulators and technology providers at the Chicago Hilton last week.
Grant sat on one of the four panels dedicated to this burgeoning new asset class, with JB Mackenzie, Managing Director of Futures and Forex at TD Ameritrade and Josh Stein, CEO of Harbor, a company building a decentralized compliance protocol to standardize the way securities are issued and traded on blockchains.
Moderated by Don Wilson, CEO of DRW, the panelists took a big picture approach and talked about the global adoption of cryptocurrencies.
Stein compared it to sending snail mail over typing an email.
“It’s the same content in the letter to mom but instead of waiting three days to follow up, I know the email will arrive in a few moments,” he said. “It’s about being faster, cheaper and easier.”
Mackenzie talked about his experience easily buying bitcoin internationally at the local 7/11.
“When I was in Taiwan, we heard that you could buy bitcoin at the ATM down the street,” said Mackenzie. “It was exciting until we bought bitcoin and all that came out was a receipt, but it’s that mainstream in other parts of the world.”
He also believes investors need to be comfortable with their digital asset transactions.
“If it’s as easy as going to your TD Ameritrade account and making that transaction, I think that is what the investor is looking for, that comfort level.”
The Institutional Perspective
Enabling participants to feel comfortable was echoed in another discussion at the conference, focused solely on the institutional perspective of digital assets. Moderated by David Olsen, President and Chief Risk Officer at Jump Trading; the panelists included Chris Hehmeyer, President and CEO of Hehmeyer Trading + Investments, Tom Jessop, Head of Corporate Business Development at Fidelity, Hu Liang, CEO of Omniex, a front-to-back office crypto trading platform and Kelly Loeffler, CEO of Bakkt.
Hehmeyer believes that safety and soundness will bring the institutional investors into the crypto markets.
“Why do people trade at the Intercontinental Exchange (ICE)? Because they are confident with the platform,” he said. “Institutions won’t get into this space until they are comfortable and we have worked out the safety and soundness of these new markets.”
Hehmeyer reminisced about his first time on the trading floor as a clerk in 1977 and how he was “gobsmacked” at the excitement and growth with the launch of the Treasury Bonds contract.
“It was the same phenomenon when I was able to pay a guy in my office a few bitcoin from my phone, without any other parties being involved,” he said, about his first interaction with digital assets.
Loeffler remembered the day she was first intrigued by cryptocurrencies.
“It was Memorial Day 2014 and we were talking to a blockchain start up on our couch at home,” she said, referring to her husband and owner of ICE, Jeff Sprecher. “We figured that DLT could address the lack of institutional infrastructure, price discovery and security in the crypto space. These are things taken for granted in the traditional markets.”
Loeffler also believes that there are use cases missing in crypto and is working with strategic partners such as Starbucks and Microsoft to approach this challenge.
“We need these types of partners to get the public’s acceptance,” she said. “Merchants can use this technology to establish relationships with their customers and help build trust in this asset class.”
Liang also spoke to the public’s acceptance of cryptocurrencies and addressed the common metaphor made between crypto and the Internet.
“We are in the very early stages of this space. The Internet first appeared in 1960 but we didn’t hear about it until the 1990’s and it took even longer for us to adapt to it,” he said. “Crypto only surfaced in 2009.”
Exchange Leaders: Digital Assets Edition
The conference also featured an exchange leaders panel focused on emerging derivatives products in the digital assets space. The conversation was moderated by Bob Fitzsimmons, Executive Vice President of Wedbush, which was one of the first Futures Commission Merchants (FCMs) to clear bitcoin when Cboe Global Markets and CME Group launched the contracts last year. He was joined on stage by Paul Bauerschmidt, Product Lead at Coinbase, Trabue Bland, President of ICE Futures US, Nick Goodrich Director of Business Development at trueDigital Holdings, Tim McCourt, Global Head of Equity Products and Alternative Investments at CME, John Tornatore, Global Head of Crypto at Cboe as well as Thomas Chippas, CEO of ErisX.
McCourt kicked off the conversation by talking about what is unique to the bitcoin market.
“Commodities markets are driven by supply and demand but what is unique to bitcoin is that there is a limited supply with only 21 million bitcoin being produced,” he said. “The demand is driving the price discovery.”
Tornatore spoke about the various participants in the crypto markets.
“We have seen traditional participants stop trading everything but crypto and we see new players such as the miners who want to hedge their coins,” he said. “This is bringing in a variety of different players.”
Bland also touched upon the people trading these new products and how this will impact future traders.
“There are not many chances in your career to work on an entirely new asset class and we realized that the next generation of traders will come from the crypto markets,” he said. “The next generation of sugar traders for example will come from the crypto markets, not the other way around.”
Chippas, whose ErisX platform will differ from CBOE and CME’s crypto offering in that it will be a physically delivered product, rather than cash settled, believes this is what will bring in the institutions because it’s what they understand.
While many of the conversations revolved around cryptocurrencies, the participants as well as the adoption of the digital asset space, it seems there is still work that needs to be done to attract institutional flow. Safe, secure and sound infrastructure will attract institutional investors but familiarity may be the key.
“There is a lot of evolution that needs to happen here. We should look at implementation before focusing on innovation,” said Chippas. “Let’s get all the FCMs to clear the products first and keep this familiar to get it off the ground.”