The Rise of the World Class Secondary Digital Asset Exchange

Cryptocurrency has been growing in popularity at an impressive rate. However, volumes are still relatively small. This is largely because of the appeal of the crypto token to a very small set of investors. Among these are institutional financial institutions. Some of these firms have partnered with crypto-focused startups to offer their clients access to the crypto universe. A recent survey by Broadridge found that one third of these firms have already implemented preliminary strategies involving crypto.

Although the secondary digital asset exchange market is in its infancy, there is a lot to learn. Many companies are building infrastructure to support the digital financial system. For example, R3 is a company that is tying together a large number of participants in the markets it serves, including banks and brokers. Similarly, Tokeny Solutions is developing a modular end-to-end platform that includes a collateral management module.

Another example is the open-source protocol known as the smart contract. This technology is designed to facilitate trades without intermediaries. Using this technology, it is possible to build and manage a decentralized, secure and private marketplace for the trading of property rights. One of the first applications of this technology is the “China Cultural Protection Chain” that is currently operating in China.

The same technology is also used to digitally represent traditional assets in custody. Among these are real estate, stocks and bonds. Interestingly, the size of the private market for these products outpaces the public market in all three.

A more complex example is the use of DLT to embed digital assets into a regulated banking environment. This is done by a specialist solution provider, which has shown some promise in delivering the digitally powered solutions. There is a growing interest among leading financial institutions to adopt and implement the technology.

As the digital asset market matures, it is expected that there will be a corresponding increase in demand for prime brokers that can offer their clients integrated solutions. Ultimately, this will create a consolidation of the industry.

In fact, a comprehensive regulatory framework for the digital asset space may be the catalyst for an industry revolution. It will provide market participants with confidence in the stability of the markets they are investing in, and draw in a broader base of investors. These changes will ultimately result in more effective administration of alternative asset managers and more efficient tax accounting.

The CFTC has announced that it will investigate a proposed regulation for the “digital asset market.” The agency is also conducting a review of the compliance processes of member firms of the Financial Industry Regulatory Authority (FINRA). While the proposed regulation is not a comprehensive one, it will nonetheless be a first step towards enhancing oversight of the market.

Several states are active in the policing of digital asset conduct. For instance, Texas has taken a slew of measures to combat this activity. But the biggest opportunity lies in the real estate and private debt markets, which are both ripe for digital innovations.