How Buy-side Firms Are Reviewing Cryptocurrencies for Their FX Trading Desks
Cryptocurrencies have gone from a fringe interest to a major theme in FX. For buy-side firms, understanding digital innovation is a key focus – and a significant challenge.
The growing importance of cryptocurrencies such as Bitcoin and Ethereum for buy-side firms was on display in late March when BlackRock CEO Larry Fink placed the digital assets in the context of the Russia-Ukraine war. According to Fink, the war could accelerate the use of digital currencies to settle international transactions. What’s more, Fink said increased client interest had prompted the asset manager to study digital currencies and ‘stablecoins’. “A global digital payment system, thoughtfully designed, can enhance the settlement of international transactions while reducing the risk of money laundering and corruption,” the CEO said.
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Fund flow
Hedge funds and other institutional investors are now massively increasing their crypto investments. According to a July 2021 survey from Fidelity Digital Assets, seven out of 10 institutional investors expected to buy or invest in digital assets in the future, with more than 90% of respondents who were interested in such assets expecting to have an allocation in their institution’s or clients’ portfolios within five years. Such investors are starting to make their presence felt. According to some reports, digital asset market structure is increasingly being influenced by institutional investors.
A report by Coalition Greenwich – ‘Digital Asset Market Structure: Institutions Take the Reins’ – found that the market is moving in important ways, with the adoption of products like ETFs and futures. David Easthope, senior analyst for Coalition Greenwich Market Structure & Technology, said there are “a seemingly countless number of firms moving in to fill the gaps for institutional trading of digital assets, such as trading platforms, prime services, market making, surveillance, analytics, custody, and settlement”.
Central banks
The market is also evolving in ways that will likely make it more accessible (and palatable) for major firms. That’s particularly true when it comes to the interest from central banks, which are “rolling up their sleeves and familiarising themselves with the bits and bytes of digital money”, according to Kristalina Georgieva, IMF managing director.
Speaking to the Atlantic Council in February, she noted that about 100 countries are exploring central bank digital currencies at one level or another. “If CBDCs are designed prudently, they can potentially offer more resilience, more safety, greater availability, and lower costs than private forms of digital money,” she said. “That is clearly the case when compared to unbacked crypto assets that are inherently volatile. And even the better managed and regulated stablecoins may not be quite a match against a stable and well designed central bank digital currency.”
That’s not to say it’ll be plain sailing for buy-side firms, with security concerns a particular focus. Still, it’s become increasingly clear that cryptos are going nowhere, particularly as central banks and governments enter the fray. Buyside firms must adapt and seize the opportunities ahead.
Take a look at our TradeTech FX Europe report now and discover exclusive survey data on cryptocurrencies.