In recent times, the allure of cryptocurrency has captured the attention of Wall Street firms. Grayscale's recent victory over the US Securities and Exchange Commission and ongoing discussions surrounding a potential Bitcoin ETF by BlackRock have ignited a significant shift in market sentiment within the cryptocurrency space. Several companies, including Valkyrie, Bitwise, WisdomTree, and Invesco, have swiftly followed suit, filing for their own ETFs.
Traditional financial players have also been making noteworthy strides in the crypto arena. Deutsche Bank, a $1.4 trillion asset manager, has applied for a license to offer crypto custody services. Meanwhile, EDX Markets, a new crypto exchange backed by Bastion, Fidelity, and Charles Schwab, has recently launched its operations. PayPal has further solidified its presence in the space by introducing its own stablecoin project.
But the question on many minds is whether crypto is prepared to handle the massive influx of institutional capital.
Indeed, it is.
How Prepared Is Crypto?
The readiness of crypto hinges on several factors, including regulatory clarity, the robustness of infrastructure providers, and market makers. These elements play a crucial role in attracting institutional investors, as they ensure the maintenance of stable, transparent, and well-coordinated markets.
1. Centralized Finance (CeFi) - Already Positioned for Wall Street
When discussing CeFi, we refer to established cryptocurrency platforms that already offer services familiar to traditional financial players, such as Coinbase and Gemini. These platforms, by largely adhering to Web2 infrastructure, are equipped to handle the scale of Wall Street operations. They boast healthy market volumes and engaged market makers. Additionally, many jurisdictions are providing regulatory clarity on how to engage with these services.
Of course, there are some nuances to be addressed, such as the absence of genuine prime brokerage setups and robust insurance coverage at scale. However, given time and increased asset backing, these issues can be resolved, and they should not be seen as insurmountable obstacles.
2. Delivering Valuable DeFi Solutions
When considering DeFi, we must recognize its potential to serve two distinct roles in crypto markets: as a settlement layer for non-custodial services with some centralization (referred to as "Backend DeFi") or as a purely decentralized system ("Pure DeFi").
- Backend DeFi: This category of projects still maintains some centralized oversight, making them more compatible with the traditional finance approach. Examples include OTC services with atomic settlement through platforms like Fireblocks or Copper, as well as digital asset settlement platforms for derivatives trading, such as Worldview.
Backend DeFi possesses the necessary infrastructure to act as a settlement layer. Many layer-2 DeFi services offer the speed and cost-effectiveness required for Wall Street operations. They have market makers providing robust liquidity and the capacity to handle large volumes. Their ability to comply with regulations further facilitates institutional adoption, although gaining approval from large institutions may take time.
- Pure DeFi: In contrast, Pure DeFi operates in a relatively permissionless and decentralized manner, exemplified by protocols like Uniswap or Curve Finance. While this sector represents a significant paradigm shift, it remains furthest from readiness for institutional adoption.
Pure DeFi protocols are subject to numerous unpredictable factors due to their experimental nature. The recent Curve Finance exploit serves as a prominent example. Such factors may be deemed too risky for most institutional investors, who are reluctant to entrust their assets solely to software. Additionally, the permissionless nature of Pure DeFi brings regulatory challenges.
This is not to say that Pure DeFi lacks value; it represents an intriguing area of exploration for all market participants. However, it currently serves as a launching pad for new types of financial instruments that may eventually find their way into more institutionally-friendly environments.
Ready for Inflows
In summary, the prevailing sentiment is that crypto is closer to readiness than not when it comes to accommodating Wall Street's capital influx. Certain sectors are better prepared than others, and attention should be directed towards areas where initial interest is likely to flow.
As traditional financial institutions continue to dip their toes into the crypto waters, the most plausible scenario is that they will initially engage with CeFi, an area already primed for such attention. Wall Street's receptiveness to cryptocurrency markets is expected to grow over time as Backend DeFi and Pure DeFi evolve.
This is a great news if it comes to past. It is a win in the cryto community and will be more beneficial to we the Hivers.