Crypto-specific jobs and standard finance businesses likewise have been ramping up their respective offerings to cater to the requirements of the particular client base.
Though a great deal of effort was put into building protected infrastructure and solutions to financial institutions to go into the cryptocurrency area, cloudy regulations remain a substantial barrier to institutional adoption.
Rising Interest in Institutional Cryptocurrency Investment
Last year has been marked by the entry of professional associations and traders to cryptocurrency, driven by the potential for value appreciation and portfolio diversification.
Boris Bohrer-Bilowitzki, the head of sales of digital assets custody and portfolio management firm Copper Technologies, sees institutional investors going into the cryptocurrency area: “From very public entrances like U.S. pensions and university endowments to European pension funds, family offices from all over the world, and sophisticated fund structures and strategies. There is also an increasing number of U.S. high-frequency trading getting into this space.
“If you’re technologically minded, there has never been a better time to be in finance. All the rules are being re-written as people begin to understand the potential of distributed ledger technology (DLT) for any asset class, traditional or digital.”
For Scott Freeman, co-founder and spouse of JST Capital, an electronic assets financial services company serving institutional investors, demand has accelerated over the last months:
“Whereas in the past many investors did not want to be the first to enter this space, we’ve now seen first movers enter the space, and now others are willing to invest in crypto as a diversified, uncorrelated investment. The market continues to evolve quickly. Clients are more comfortable than they were three months ago and will be more comfortable with investing in digital assets three months from now.”
JST Capital was set in January 2018 to deliver conventional and sophisticated financial instruments and options for banks, brokers and institutional investors coping with this fast-growing asset class.
Asian Markets: A Increase in Institutional Cryptocurrency Interest
According to Freeman, JST Capital has witnessed traction in both the U.S. and Asia, just two markets the company has operations inside. He explained the trend has been driven with these markets’ respective dynamic blockchain startup ecosystems and overall greater awareness of their technology.
“The Asian market tends to be more driven by retail investors, though we have seen an increase in institutional interest from Hong Kong in particular. We see a lot of blockchain innovation still coming out of Silicon Valley but more recently we’ve seen a lot of projects out of Asia gaining traction.”
Alongside JST Capital, Switzerland’s fintech startup Crypto Finance continues to be trying to serve Asian institutional investors attempting to acquire exposure to cryptocurrency.
On September 10, 2019, the business declared the growth of its professional electronic assets services offering into the Asia-Pacific area “a dynamic, vital region that plays a big role in both the traditional financial sector and the emerging digital assets markets.”
Crypto Finance provides controlled asset management, brokerage and storage options in electronic assets for top European and Korean banks and financial institutions, the business claims.
Need for Institutional Cryptocurrency Custodial and Trading Services
Until recently, one of the primary hurdles to institutional adoption of cryptocurrency has been custody, or the capability of financial institutions to maintain and secure cryptocurrencies on behalf of trading clients.
Without doubt, there are great reasons to worry, given the cyber threat connected with crypto-assets and their history of hacks and fraud.
Copper Technologies was founded in January 2018 to address only that. At the moment, services accessible only failed to fulfil customers’ safety criteria.
Copper’s standalone cryptocurrency custody program, Copper Unlimited, has many built-in safeguards and utilizes techniques like key sharding to guarantee maximum safety. Essential sharding is a procedure where a private key is divided into different bits, or shards, then dispersed between reputable third parties.
Copper also employs an Optical Air-Gap because of its cold storage, which offers an extra layer of security which prevents offline machines from becoming infected with malware.
Though safety is paramount for crypto resources, there is also a demand for rapid access. For this end, Copper Platform, a settlement and trade infrastructure firm, has been launched in June 2019. It joins custody with numerous exchanges such as Bitfinex, BitMEX and Binance, in addition to OTC desks.
Bohrer-Bilowitzki from Copper Technologies said:
“Having your private key locked in a mountain vault is all well and good, but it doesn’t help you execute a variety of trading strategies,” Bohrer-Bilowitzki said. “The safeguarding and trading infrastructure was developed specifically to marry the worlds of ‘hodlers’ and those that need constant, quick and secure access for trading purposes.”
As the business evolves, better alternatives will emerge.
Scott Freeman, co-founder and partner of JST Capital:
“The market is more advanced than it was six months ago and we expect to see better and more robust solutions to solve this issue over the next three to six months,” Freeman said. “There is a tremendous amount of energy going into improving custody solutions to match the needs of institutional investors, as well as the accountants and auditors who need to make sure the solutions are compliant with current standards of financial reporting.”
A Booming Institutional Cryptocurrency Industry
JST Capital, Copper and Crypto Finance are a portion of this expanding list of businesses targeting institutional gamers.
In reality, because 2018, the institutional-grade trading of cryptocurrencies and tailored custody solutions have escalated in number, together with recognized crypto startups such as the trades Coinbase, Gemini and itBit, in addition to blockchain security firm BitGo, all launch services.
Coinbase introduced its own suite of institutional products in May 2018, which it has since enlarged through tactical moves such as getting Xapo’s institutional companies in August 2019. That’s how it became the world’s biggest crypto custodian, with more than $7 billion in assets under custody. It claims to serve over 120 customers in 14 distinct nations.
BitGo obtained the green light out of South Dakota labs in September 2018 to produce and run a cryptocurrency custody support. In May 2019, the business expanded its institutional offering together with the launching of a new clearing and settlement system running off-chain.
However, this booming sector is going to get much more crowded, as conventional players have started entering the distance.
In October 2018, American multinational financial services company Fidelity Investments established an electronic advantage arm to manage crypto custody services in house and execute transactions for investors like hedge funds and family offices.
Legacy Trust, a conventional retirement and household citizenship founded in 1992, lately pivoted to function the cryptocurrency community, starting exactly what it claims is the world’s first voluntary retirement plan encouraging electronic resources on September 4, 2019.
Regulatory Landscape Requires Improvement
Institutionalization is a crucial next step for cryptocurrency to attain mainstream worldwide approval, and while startups and conventional financial institutions alike are building out the infrastructure and resources required for professional dealers and institutional customers to engage, an integral challenge hampering institutional adoption stays: regulation.
JST Capital’s Freeman said:
“Institutional Investors are eager for more regulatory clarity, particularly in the U.S. Crypto has not been around for very long and there are also some investors who simply want to see crypto-assets continue to be adopted and traded.”
Copper’s Bohrer-Bilowitzki noted that progress was made concerning cryptocurrency regulation within the last year. Undeniably, Facebook’s contentious Libra project has included a feeling of urgency into the job, but there is still a very long way to go.
“I think the technology is there, but what is still lacking is an understanding at a regulatory/industry level about what custody means for digital assets,” Bohrer-Bilowitzki said. “The regulatory landscape still needs to improve. The lack of agreement among national/regional bodies is still discouraging to some. But this too is changing rapidly for the better.”