As the TOKEN2049 cryptocurrency conference got under way in Singapore on Wednesday, speakers paid due reference to the ongoing Crypto Winter – while making clear their determination to see it off – but another strong theme was crypto adoption by mainstream finance.
The adoption of cryptocurrencies and other digital assets by the traditional finance industry is a love-hate proposition for much of the crypto community – one that invites accusations of “selling out” by crypto-libertarians, yet is tempting due to the rewards and respectability that come with it.
A line-up of executives from TradFi and crypto companies explained the importance of the latter to conference attendees who, buffeted by the prevailing market misery, appeared to require little convincing. More importantly, the speakers said, institutional finance was giving crypto its full attention and investing in it.
Darius Sit, a managing partner at crypto asset trader QCP Capital, said his firm had seen a big increase in institutional involvement in crypto derivatives and options, and that last month, one-third of the company’s options trading volume had come from a single hedge fund. Sit described the crypto industry as one that traditional finance now regarded as “prime and practical” to be involved in.
Crypto-trading platform Bitmex’s chief executive, Alexander Höptner, said the current bear market, far from sowing doubts among institutional finance players, was encouraging them to pile in.
“It’s actually an ideal time when you look for classical market participants,” he said. “Bear markets are fantastic. We’ve not seen a single institutional player dropping out because of the situation of the market.”
Kayvon Pirestani, head of Asia-Pacific institutional sales at Nasdaq-listed Coinbase, the world’s second-biggest crypto exchange by trading volume, told a packed conference hall that despite the market downturn, institutional interest in crypto remained robust, pinpointing two factors behind the durability of institutional demand.
“The first is what I call a ‘flight to quality’ trend,” he said. “This was most pronounced in the wake of the UST Terra blow-up. Suddenly a lot of people woke up … for the very first time, that there’s really big credit risks in the world of crypto. So people started to take a really close look at the types of products they were trading, the types of counterparties, and the platforms they were trading on, and they came to the realization that these risks are mispriced.
“The other angle that I think is driving this sort of robust institutional interest, despite the down market, is the fact that the current price levels represent a really interesting entry point for those investors – the larger asset managers … We’ve seen those folks ask us to accelerate their onboarding or accelerate conversations to activate more quickly so they can get in at what could be generational entry points into this new asset class.”
Pirestani said that institutional investors typically entered the crypto market by buying Bitcoin or Ethereum and branched out from there.
“They get comfortable with holding that position over time and confident that everything’s working properly,” he said. “But once they cross that cross that threshold of feeling comfortable with owning some crypto it’s been really interesting to observe that they quickly move up the risk curve and the complexity curve in ways that have been surprising to me – where they’ll say, ‘Right, got Bitcoin and Ethereum, what about Solana? Can you give me some size in Solana? Or maybe I want to do some lending, maybe I want to do some staking.’ And so we find that Bitcoin and Ethereum are sort of ironically, are sort of a little bit of a ‘gateway drug’ into the pretty exciting world of crypto.”
Beyond that fairly well trodden path, behavioral patterns among investors differ markedly, according to QCP Capital’s Sit, who made a distinction between HODLers and more active traders.
He said that on his company’s trading site, corporates and family offices mostly fell into one of the two categories, with the latter reliably on the lookout for new and, where possible, game-changing market developments.
“They tend to participate on a very narrative-driven basis,” he said. “So this year, with the ETH Merge, we saw a lot of interest in ETH derivatives … It’s very narrative-driven, and so the next big narrative in line is probably the Bitcoin halving in 2024, so the question that we all have is, ‘What’s the next narrative in between, from now to 2024?’ because I think that’s something we should all look for and look forward to.”
He made a further distinction between investor behavior in Asia and elsewhere, saying that the Hong Kong and Singapore markets, in particular, were much less about buying and holding crypto assets and more geared to changing course on patterns of volatility.
Höptner also emphasized the differences between markets in Asia and those in the U.S. and Europe.
“[In] the U.S. it’s an asset to store, to hold,” he said. “Europe is a bit in between, and the companies are talking about the holdings that they have, and Asia is all about trading. Now, all the discussions we have on all of our trading with all the [Asian] family offices – whether it’s art, whether it’s anything – it’s all about trading. ‘Hey, can we tokenize it? Can we trade it?’ That’s all the story.”
Justin Sun, founder of the Tron blockchain, said that however investors behaved, crypto businesses had a level of fiduciary duty that was akin to that borne by companies in the traditional finance sector.
“We need to learn from the traditional finance industry, because at the end of the day, I think crypto is the same as traditional finance institutions because most of the things we are doing here is controlling people’s money or moving people’s money or basically respond,” he said. “We have a huge financial responsibility.”
With a certain inevitability, many of the speakers at TOKEN2049 raised issues relating to regulation, and, in a sign of the industry’s growing maturity, demonstrated a willingness to embrace discipline for the benefit of their customers, their own longer-term interests, and the development of the sector overall.
Regulation in crypto is frequently regarded with suspicion, and Saurabh Sharma, a partner and head of investment at Chicago-based Web3 development firm Jump Crypto, described it as a challenge because of the difficulty of coordinating rules at a national and transnational level.
Zaheer Ebtikar, a portfolio manager at digital asset quant firm LedgerPrime, advocated rules to spur the crypto industry’s development.
He said: “I think the number one driver of both innovation and also capital introduction will be regulation – and not regulation in the sense that we need to go ahead and ban crypto assets but, rather, people are unsure of what they’re unsure about today, which is a huge problem for any sort of institutional investor but also for any mainstream pockets of capital.
“It’s [about] working with regulators very, very closely and I hope the [regulators] in the room can … work towards that goal of having a very robust, very clear regulatory framework. And I think that’s what will get us to the maturation of the asset class.”
Will Peets, chief investment officer at digital asset-focused 100 Acres Ventures, reinforced that message, saying that building bridges with regulators and “not just having a combative relationship with authorities and with the state” would contribute to the industry’s growth by further driving mass adoption.
Tim McCourt, the global head of equity and foreign exchange products at derivatives marketplace CME Group, drew on his company’s experience to make a detailed point.
“Early on, we made a decision – we wanted to operate as a regulated venue offering regulated products, and that’s certainly something that’s resonated strongly with the institutional community because they need that guarantee or that confidence of how to take those final steps into the industry,” he explained.
“I think the challenge, though, is that somehow over the last few years, to see that regulatory oversight can be a bad thing. And I think, actually, that the opposite holds true – where if we did get further clarity in more jurisdictions, it would further increase the speed of innovation, because there would be certainty – there’ll be finality about some of these topics that are overhanging the industry.”
Crypto exchange FTX’s chief operating officer, Constance Wang, emphasized that collaboration with regulators rather than confrontation was the best course for the industry.
“Even though it seems like the regulator is coming after crypto hard, from our perspective, I always feel like our working relationship with regulators should be an open and friendly dialogue, a two-way communication instead of a one-way of them asking us what’s happening,” she said.
“It’s not just about a regulator coming down to crypto companies – it’s also about us telling them what’s happening, and how this industry has evolved in the past five years, and where it’s going to go, and what our vision and mission is,” she added. “It’s already moved way beyond ICOs and shitcoins and, you know, the scammy stage, and everyone is actually building.”
But it was Pirestani who had perhaps the last word on regulation and the way in which the industry could most effectively engage with it to serve its growth and acceptance.
“I think increasing regulatory clarity in key markets like the U.S. would really remove a lot of sort of overhang and uncertainty from the space,” he said.
“But actually, the more interesting thing – and the thing that I love so much about crypto – is we don’t really know what’s going to drive the next wave of adoption or enthusiasm. But it’s going to be something, some piece of innovation that comes out of nowhere that’s going to surprise us the way that DeFi did a few years ago, the way that NFTs did.”