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Digital Asset Infrastructure as a Success Factor for Financial Institutions

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Andy Flury is founder and CEO of Wyden, a company providing institutional trading technology for digital assets.

Over the past nine months, Bitcoin has seen a surge of around 50 percent. Blackrock, the world’s largest asset manager, has applied for a BTC ETF. And Germany’s largest credit institution, Deutsche Bank, is currently in the approval process for a crypto custody license. Added to this is MiCA and thus increased regulatory security for institutional investors. All this leads to institutional adoption being at a significant threshold – which makes the decision for the right infrastructure all the more important.

However, things looked quite different in the crypto market last year. In the crypto winter of 2022, Terra-Luna and Celsius stumbled, Three Arrows Capital was ordered to liquidate, major players such as Gemini, Genesis and Grayscale fought legal battles with the SEC, and in November FTX had to initiate insolvency proceedings and the crypto market valuations took a big hit.

In addition, in early 2023, the insolvencies of US banks – Signature, Silvergate, and Silicon Valley Bank – had profound effects on crypto trading, established procedures, and the related venture capital market. This made it clear that the rules of traditional finance, economics and governance did in fact apply to the crypto market.

Looking back now reveals many weaknesses in this market that are currently being addressed. A look into the future shows that the institutional adoption of the new asset class is at an important threshold. Even more so as the EU’s MiCA regime will come into force in less than a year, offering European banks a significant market advantage – especially as the United States is falling behind due to its upcoming presidential election.

Minimizing Counterparty Risk As A Key Issue For Banks

Similar to traditional assets, cryptocurrency trading includes various functions such as custody or brokerage. These are strictly separated from each other in the TradFi sector as part of stringent risk management policies. However, at FTX & Co, this governance principle was ignored, leading to a cascading negative impact and eventual downfall. Banks should therefore ensure that internal governance guidelines exist and are adhered to when connecting to crypto exchanges and other service providers.

As banks chart their digital asset strategy, they confront a market riddled with fragmentation with hundreds of centralized and decentralized crypto exchanges, OTC desks and brokers. To ensure a best execution policy for itself and its clients, which is also required under MiCA, among other things, a bank must connect multiple trading venues to its own platform. These can have large variances in price and liquidity, which can be exploited opportunistically through smart order routing to get the best average price spreading a single order across multiple venues.

Diversification is also advisable in the context of risk management. A singular trading venue’s collapse could spell a catastrophic asset loss. Connecting several trading counterparties increases the complexity and liquidity costs of a bank, but significantly reduces the risk of default. Rigorous vetting of trading counterparties is necessary as part of the due diligence process in order to clarify liability issues in advance. Here, for example, it should be determined who is liable if a downstream trading platform used by a trading counterparty runs into payment difficulties.

After Silvergate And Signature, Importance Of Smart Cash Management

The recent downfall of US banks, Signature and Silvergate, cast a long shadow, affecting not just their clientele but the broader crypto trading ecosystem. These banks had facilitated instantaneous USD transfers to crypto exchanges, thereby minimizing assets held at these venues. Current cash management alternatives, however, seem to be in their infancy.

While stablecoins grapple with volatility and transactional delays, SEPA offers instant liquidity in euros. Yet, its transactional caps and limited market reach pose challenges for institutional trading. And FedNow, the instant payment service launched by the Federal Reserve, has yet to establish itself to achieve the desired network effects. Off-exchange settlement solutions via providers such as Copper ClearLoop or Fireblocks are the most likely to provide an effective means of efficient cash management – allowing funds to be transferred instantly to exchange accounts prior to a trade.

In addition to a centrally managed liquidity pool, the automation of liquidity management is a useful component of smart cash management. Individual functions such as pre-funding, rebalancing or payment settlement are automated. Another modality is dynamic cash management: in this way, money parked with crypto exchanges can be increased during trading hours and reduced or withdrawn completely outside of trading hours.

Trade Lifecycle Orchestration And Seamless Integration

The technical implementation of trading cryptocurrencies requires a bank to connect additional systems to their core banking infrastructure. A custodian suitable for institutional-grade trading secures the private keys that enable safekeeping of client assets. Furthermore, a trade order execution system that can access various crypto exchanges is needed.

Finally, a solution is needed to orchestrate all functions described above, as well as to integrate other functions such as liquidity or risk management. The Wyden platform is currently the only one to offer such a range of functions. In their digital asset strategy, banks must remain attuned to their unique needs, risk profiles, and customer demographics.

Banks As Established And Trusted Access Points

Established financial institutions have clear incentives to further their digital asset strategies. From a bank’s viewpoint, among the four current business cases—crypto, NFT, DeFi, and tokenization—only crypto has consistently demonstrated clear market demand and assured revenue potential for institutions. From a retail or investor perspective, a regulated bank’s digital asset offering presents an elegant solution – bridging the need for security and convenience.

A regulated bank as a “trustee” of cryptocurrencies ensures safekeeping of customers wallets. In addition, access to crypto and digital assets is greatly simplified as the bank acts as a one-stop shop for all asset classes – from traditional to digital assets. Wealth advisors can provide comprehensive risk management education and help with portfolio diversification. The expansion of the bank’s own offering, e.g. via staking, increases customer convenience, provides the bank with valuable data and further touchpoints, and at the same time makes it a central, trustworthy partner.

If banks manage to learn from the mistakes of the past crypto winter, nothing will stand in the way of institutional crypto trading coming of age. The technological prerequisites of a professional and integrated trading ecosystem are there. The task now is to implement them across the board in the banking sector – even more so as MiCA will add increased regulatory certainty for financial institutions.

Considering the evolving landscape, it’s evident that beyond just infrastructure, regulation is pivotal for an institution’s digital asset strategy. This will inevitably lead to diverse regulatory regimes across different regions, significantly influencing their attractiveness. Consequently, for European banks in particular, it’s imperative to not only build internal knowledge and infrastructure but also to stay abreast of these regulatory shifts.

This is a guest post by Andy Flury. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

​ As traditional financial institutions look at proper Bitcoin integration into their services, the importance of reliable and secure infrastructure becomes clear. 

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Great Scott! If Only We Could Go Back to 2009 to Buy Bitcoin!

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It’s 2024. Donald Trump has just clinched the election again, Bitcoin’s hit a new all-time high, inflation’s running hotter than the DeLorean’s flux capacitor, and everyone’s wondering, “What’s next?” As we all wrestle with the wild pace of history, there’s a flash in the sky, a crackle of lightning, and who should appear but Doc Brown himself. He hops out of the DeLorean, eyes wild and hair wilder, and says, “Forget sports almanacs, Marty! We’re going back – not to 1985, but to 2009, before anyone knew what a Bitcoin even was!”

Yes, we’d all love to jump into that time machine and zip back to January 3, 2009 – the day Bitcoin’s genesis block was mined. Get it cheap, stockpile our wallets, and maybe even tuck a few under the couch cushions. But here’s the catch: Bitcoin doesn’t work that way. Its greatest strength? “Everyone gets the price they deserve.” No one gets a free ride, and Bitcoin doesn’t have a rewind button – only a road forward.

Doc Brown was onto something when he said, “Roads? Where we’re going, we don’t need roads!” The path Bitcoin forges isn’t one of shortcuts or regrets. It’s a one-way journey to the future, with a price tag that keeps moving forward. It doesn’t care if we wish we’d started at $1 or $100 – it’s relentless, and that’s the point.

Today, people freeze at the current price, haunted by unit bias, plagued by a “missed opportunity” that exists only in hindsight. But Bitcoin’s value doesn’t lie in a magical price point of the past; it lies in the present – in its steady march into the future. And standing on the sidelines, waiting for some impossible dip or trying to summon 2009 prices, is like being Biff: always scheming, always missing the point.

If Marty learned anything, it’s that you can’t stand on the fence and hope things will work out. Biff, forever clueless and out of touch, is the perfect example of what happens when you miss the future staring you in the face. Imagine Biff in 2009 – he’d be mocking Bitcoin, laughing it off, and then spending decades regretting every lost satoshi. Don’t be a Biff. Don’t let hindsight or wishful thinking stop you from joining the future.

We all wish we’d snagged Bitcoin at the price of a coffee, but that DeLorean opportunity is long gone. Doc Brown would tell us the same thing he told Marty: “The future is what you make of it, so make it a good one.”

So, next time you’re looking at Bitcoin’s price today, heart pounding like you’re about to hit 88 mph, remember: there’s no going back to 2009. There’s just the next block, the next satoshi, and the next step forward. Where Bitcoin’s going, we don’t need time travel – we just need the courage to act. And like Doc would say, when it comes to Bitcoin, where we’re going, we don’t need regrets.

This article is a Take. Opinions expressed are entirely the author’s and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

 As we barrel through 2024, the dream of hopping in a DeLorean and rewinding to 2009 to buy Bitcoin at pennies per coin tempts us all. 

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Bitcoin Businesses Feel Safe In The U.S. In Wake Of Trump Victory

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This morning MARA, the largest publicly-traded Bitcoin mining company, shared that it will be rolling out three new data centers in the U.S.

Would it have made such an announcement had Harris won the election? Probably. (It’s not like they whisked up these data centers overnight.)

But would they have made the announcement with such gusto, highlighting the fact that the bitcoin the company mines will be “Made In USA”? Probably not.

The “Made In USA” line is likely a nod to President-elect Donald Trump, who’s said he wants all future bitcoin mined in the United States.

Since Trump won the election, the stocks for bitcoin mining companies across the board have skyrocketed, with CleanSpark (CLSK) even being halted due to such breakneck upward price action, indicating that not only miners but also investors believe that Bitcoin mining is welcome in the U.S. and that the industry will thrive as a result.

And it isn’t only Bitcoin miners who feel that Bitcoin companies are safe to operate in the U.S. Alex Leishman, CEO and CTO of Bitcoin exchange River, also believes that the Trump administration will be kind to Bitcoin businesses (and Bitcoin holders).

In this tweet, Leishman seemingly refers to the promise Trump made in his keynote speech at Bitcoin 2024 to protect the right to self-custody and to stop the Federal bureaucracy from unlawfully cracking down on the Bitcoin and crypto industry.

Will Trump follow through on all of his promises? Hard to tell.

It seems likely that he will, though, as money talks and the Bitcoin/crypto lobby raised millions for Trump’s campaign.

For now, though, optimism abounds, which is refreshing after four years of the Biden administration, which made Bitcoin and crypto companies feel uneasy about their status in the U.S.

 The Bitcoin industry breathes a collective exhale as Trump’s Bitcoin-related rhetoric and policy proposals should be a boon for the industry. 

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The Race Is On To Frontrun The U.S. Government

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https://x.com/pete_rizzo_/

With the 2024 election all but final, it’s clear Donald Trump, the soon-to-be 47th President of the United States, will be the most pro-Bitcoin leader in U.S. history

The big question remains, however: How effective will he be in operationalizing his strategy?

At Bitcoin 2024, Trump – as well as Robert F. Kennedy Jr. and Republican Senator Cynthia Lummis – made clear that they want the United States government to buy Bitcoin. All would seem to be in a better position to enact this following the election, as the Republican Party increased its representation in government considerably.

Yet, as for how quickly the U.S. could become active in the market, that’s more murky. Since announcing the bill, Bitcoin has surged from $60,000 to a high of $86,000, and with the U.S. government soon to be buying, there’s even more incentive for the price to escalate.

Herein lies the problem: The United States has essentially telegraphed to the world that it intends to buy an asset that’s in scarce supply, without the concrete ability to do so.

Even with a majority in the House of Representatives and Senate, passing the Strategic Bitcoin Reserve Legislation 2024 will still require an act of Congress, and the agreement of lawmakers. It would seem foolish to expect this won’t be complex or time-consuming.

For example, the bill proposes revaluing the Federal Reserve’s gold holdings, as well as integrating Bitcoin into government financial systems. Questions will likely abound, as will operational challenges. Let’s remember it took all of three years for SEC Staff Bulletins to be adjusted just to value Michael Saylor’s public markets Bitcoin buying spree correctly.

This is the nature of government — slow and bureaucratic. Even with Trump, RFK, and other Bitcoin backers in positions of power, the chances that the U.S. government begins to acquire Bitcoin on January 20, 2025 seem infinitesimal. This is not saying that it won’t happen at all, just that it won’t be timely.

This is even to omit that there could be a prioritization challenge. Maybe the crypto lobby wants to move quickly on the long delayed market infrastructure bill. If so, Congress could become more consumed with the guardrails for exchanges, and redefining securities laws than the question of the strategic reserve. After all, they helped bankroll Trump’s win.

How much could Bitcoin rise in the meantime? With the bull market in full force, I’d argue that institutions and governments have every reason to become active in the market. There are many regimes around the world where the executive branch has enough power to begin accumulating Bitcoin today. They’d be foolish not to frontrun the U.S. government.

El Salvador started this process in 2021, and it has amassed over 5,900 Bitcoin. Yet, it faced 2-3 years of market headwinds, as traders countered its entries. Lest we forget El Salvador bought hundreds of Bitcoin at $60,000, a move that for years was fuel for its enemies.

Trump may yet do his part to boost Bitcoin. Yet, in telegraphing his intentions, he’s almost certainly created conditions that can be exploited by savvy traders.

Time will tell them if, among them, we’ll see other nation states.

 The US wants to buy bitcoin. Will other countries do it first? 

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