There has definitely been increased interest from Wall Street firms in cryptocurrencies.
Grayscale's recent victory over the US Securities and Exchange Commission and the ongoing conversation surrounding a BlackRock spot bitcoin ETF have caused a significant shift in market sentiment within the cryptocurrency space. Several companies, including Valkyrie, Bitwise, WisdomTree, and Invesco, quickly followed suit and filed for their own ETFs.
Traditional financial players have also made notable progress in the cryptocurrency space. Deutsche Bank, a $1.4 trillion asset manager, has applied for a license to offer cryptocurrency custody services, while EDX Markets, a new cryptocurrency exchange backed by Citadel, Fidelity and Charles Schwab, recently launched. PayPal continued its involvement in the space by also launching its own stablecoin project.
However, many question whether cryptocurrencies are prepared to retain the massive influx of institutional capital.
It certainly is.
How ready are you?
Determining whether cryptocurrencies are ready depends on different factors, including regulatory clarity and the strength of infrastructure providers and market makers. All of them play a fundamental role in retaining institutional investors because they guarantee the preservation of healthy, fair and integrated markets.
Overall, centralized finance is ready for Wall Street. When we talk about CeFi, we are referring to well-known cryptocurrency platforms that already closely resemble the type of services that are familiar to traditional financial players. These are platforms such as Coinbase and Gemini.
By sticking to Web2 infrastructure for the most part, they are already capable of handling the scale of Wall Street operations. These CeFi companies already have healthy market volumes and committed market makers. There is also increasing regulatory clarity in most jurisdictions on how to work with these services.
Of course, there are some details that need to be worked out, such as the lack of true premium brokerage structures and robust insurance in size. However, given enough time and larger balance sheets, these will surely be added to the system. They are not fundamental blockers.
Bringing DeFi to the table
When we look at DeFi, we need to see that the space can play two different roles in the crypto markets. DeFi can be used as a settlement layer for non-custodial services that retain some aspects of centralization (referred to here as โDeFi Backendโ). But it can also be purely decentralized (โPure DeFiโ).
The case of DeFi as a settlement layer, DeFi backend, is similar to that of CeFi. These types of operations still provide some centralized oversight, making them more compatible with the traditional finance approach.
Some examples include OTC services with atomic settlement through Fireblocks, Copper or other digital asset custodians. Additionally, there are also digital asset settlement platforms for derivatives trading, such as Paradigm for digital asset options settlement.
The DeFi backend certainly comes with the necessary infrastructure to act as a settlement layer. Many Layer 2 DeFi services provide the speed and cost level needed for Wall Street trading and have market makers that provide healthy liquidity and the ability to absorb large volumes. Their oversight capabilities also allow them to comply with local regulations.
There could be a longer due diligence process when it comes to getting the green light from large institutions. However, having full acceptance of the DeFi Backend by institutions is just a matter of optics and understanding the technology and security behind it.
There is definitely potential for pure DeFi as well. However, the situation here might be a little different than its less decentralized alternatives. When we talk about Pure DeFi, we are referring to protocols that operate in a largely decentralized and permissionless manner, such as Uniswap or Curve Finance. This sector represents the biggest paradigm shift, but, conversely, remains the furthest from being ready for institutional adoption.
Pure DeFi protocols are still subject to too many black swan factors due to the experimental nature of their infrastructure. He Curve Finance Exploitation is a notable recent example. This presents a scenario that is likely too risky for the appetite of most institutional investors, who are unwilling to trust software alone with the security of their funds. There are also regulatory challenges that arise from its permitless nature.
This is not to say that Pure DeFi does not represent an interesting point of exploration for all market participants; It is perhaps even the most interesting field to explore. However, it should currently be seen as a springboard for new types of financial instruments that could eventually become more institution-friendly environments.
smart enough
All in all, the most conservative position one can take on cryptocurrency's ability to handle Wall Street's inflows is that it is closer to being ready than not. Some sectors are more prepared than others, but we only need to focus on the sectors where initial interest is likely to go.
As traditional financial institutions continue to dive in, the most likely scenario is that they will begin to participate in CeFi, a sector that is already primed for this type of attention. Wall Street's attitudes towards cryptocurrency markets will continue to improve over time as Backend DeFi and Pure DeFi evolve.
Kevin is the co-founder and CEO of Keyrock. Before founding Keyrock in 2017, Kevin worked at Roland Berger, where he spent a few years as a consultant and began researching the expanding cryptocurrency market in 2014. With a background in business engineering and international management, Kevin is an entrepreneur at heart with a passion for use. innovative technologies to build efficient markets and increase financial inclusion.
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