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A lot of the crypto venues have costs starting from 0.3 % of the value of the transaction , which equates to $ 3,000 per million . As a platform operator , you can see the attractiveness of these levels , but for an investor a round trip cost of 0.6 %, before considering other execution costs ( slippage , market impact etc ) begins to look expensive .
What structural changes do you foresee in crypto-asset trading if it is to be successfully adopted by the institutional market ? AA : Some of it will depend on regulation and more clarity would be welcomed here , but also there needs to be some basic infrastructure available . Custody services are obviously important but a separation of execution services from custody and the provision of credit will enable a safer trading environment , but also be more capital efficient as the need to maintain assets at many trading venues would be reduced .
The credit aspect is also important as well considering how people trade OTC today in larger amounts . If two market makers want to try Bitcoin against dollars with each other today , then one side either must take counterparty risk and transfer either the Bitcoin or dollars first , or you have things going on like “ I ’ ll transfer you some of my Dollars , you transfer me some of your Bitcoin , and then we ’ ll do some more transactions and gradually get to the entire amount .” There is no centralised credit provision . Now , you can look at it and think about how that will develop . Ultimately if you want to have a measure of someone ’ s credit , you generally look at the collateral , so increased and ironically more centralised custodian offerings are the precursor for credit models developing later , which will make it more capital efficient for institutions to trade and reduce the counterparty risk . On the execution side , the retail platforms today don ’ t satisfy the requirements of institutions and I see a gradual separation of retail trading from institution trading here – as we see in more established markets . The platforms that satisfy the requirements of institutions and have the trust of existing institutions and regulators have a head start here . There are also cost advantages to platforms that are cross asset , both in terms of the platform operator , but also their customer base .
What can the FX industry learn from crypto and in what areas does crypto lead FX ? AA : There ’ s a lot to be learned from both sides . Crypto trading is maturing all the time but the current infrastructure it designed , first and foremost , for the Internet , so a lot of the exchange protocols are Internet protocols . The Internet is available 24 / 7 , 365 days a year and so is crypto . There ’ s no weekend downtime , no value date roll at 5pm New York time like there is in FX . It ’ s available all the time and that ’ s an interesting property that FX can learn from . The world never stops so why should the ability to convert from one currency to another ?
Settlement is another area where crypto leads FX . Currently settlement of Bitcoin is built into the protocol , so within an hour you can have six confirmations on the blockchain , and you can be fairly certain that your money is there and that ’ s 1 hour versus , say , T + 2 if you are trading spot FX . Crypto-asset and blockchain related settlement procedures may end up being the catalyst , but also form part of the implementation of a speed up in currency settlement .
There is also the data and volume transparency element with today ’ s crypto-asset trading venues . Whilst some of the reporting is inconsistent , you are seeing very transparent market data available , with volumes published by all the venues , and that ’ s something you don ’ t have today in real-time across all of FX . There are also lower barriers to entry for new entrants into the market than exists in FX . It ’ s easy to get started , very cheaply , trading crypto-assets , as you don ’ t have a requirement for a prime broker as you would in the spot FX market . However , the primary areas where crypto leads FX is volatility – that I don ’ t think is in question !
Will FX be the natural home for crypto-asset trading ? AA : Here I think the answer depends on the type of crypto-asset . Regulation will play a leading role and we are likely to see different market structures emerge for different types of crypto-assets to reflect the market structures we see in different assets today . As an example , security based crypto-assets will likely be regulated differently to utility-based crypto-assets and crypto-assets that are attempting to ask as money will likely differ also .
A number of the first movers in this space tend to be those that trade FX , because there are a number of properties that are the same . The market structure is similar in terms of the fragmentation of the OTC markets , the worldwide locations for trading ( which allows FX participants to leverage their infrastructure further ) and the fact that you ’ re really trading one asset for another , which very much fits into the realm of FX trading .
Ultimately , as a decentralised currency , a natural home for Bitcoin would be in FX , but this is very much dependent on what the regulatory structure looks like and how that changes going forward .
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