Crypto natives and traditional capital markets firms often consider themselves on opposite ends of the finance spectrum. Crypto natives think capital markets firms are clinging to an outdated way of operating, while traditional players argue that crypto firms act recklessly, playing fast and loose with customer funds.
In 2017, Interactive Brokers Chairman Thomas Peterffy wrote a letter to the Commodity Futures Trading Commission (CFTC) arguing that “cryptocurrencies do not have a mature, regulated and tested underlying market. The products and their markets…bear little if any relationship to any economic circumstance or reality in the real world.”
As recently as 2021, Coinbase CFO Alesia Haas said this in a Congressional testimony: “Because of their nascent stage of development and unique underlying technology, digital assets trade in markets that are fundamentally different from traditional financial markets. As a result, existing regulatory regimes often do not accommodate this new technology.”
While there may be a kernel of truth in those statements, they miss the larger picture: crypto firms and traditional capital markets are simply on different roads to the same destination.
Disruptor firms moved fast and raced to the top as crypto specialists who were leveraging innovative technology. And while they were trading products found on a blockchain, they have largely recreated centralized models built off the side of those blockchains. Peek under the hood of many of these disrupter firms and you will find things like central order books, prime brokerage-style offerings, omnibus accounts, market making and other models that look very familiar to anyone who has been working in capital markets over the past 20 years.
Further, as these firms pivot to focus on institutional clients and more hesitant retail investors, they find themselves compelled to conform to many of the traditional frameworks, policies and protections that have long been applied to capital markets. Customers want to know that their money is secure, that they can quickly access it if they need to and that their trading isn’t being front-run by their provider, to name a few examples.
On the regulatory side, more questions are being asked, and firms are increasingly expected to adopt anti-money laundering regimes like Know Your Customer and Know Your Transaction policies. Crypto native firms are adopting these procedures sometimes even ahead of government regulation – partially to build a wall against potential future regulations, but also to attract those customers that require more assurance than early adopter retail clients do.
Traditional capital markets firms also face major challenges on their journey. They’re being drawn into digital asset markets and forced to embrace a new asset class running on unfamiliar technology to stay competitive. These firms are suddenly confronting how to choose a custodian and liquidity provider, manage cryptocurrency wallets, trade products that fractionalize into 18 decimals, safeguard cryptographic keys, and evaluate risks from new counterparties and partners – all in a market that continues to evolve at a much faster pace than they’re used to.
Most capital markets firms are also realizing that they don’t need to throw away all of their existing technology and completely reinvent themselves to trade digital assets. The costs to do so are prohibitively expensive, and the trend is that most service providers are trying to enable their systems to process the new asset class. However, it does require adding new technology, new integrations and often new partners to the existing ecosystem. Managing this transition successfully will likely define whether these firms can make the change or not. While many have built in-house to cover this gap, as the market expands, scalability and cost-efficiency will start to become more important than that first-mover advantage.
If crypto firms and traditional capital markets firms are moving toward a central point, what does that intersection look like? As these two universes edge closer together and start to exert ever more pull on each other, there will undoubtedly be some collisions along the way.
Crypto natives are, electively or through regulation, moving closer to the traditional practices of capital markets – which means they’ll also be acquiring technology and expertise to help mature their processes, especially around compliance. They will also undoubtedly branch out beyond pure digital assets into traditional to sustain their growth.
Traditional firms, for their part, will reevaluate their technology topologies, be forced to bring in new components and generally move more quickly than might be comfortable.
The end result is that both crypto natives and traditional firms might end up looking more like one another than either is comfortable with.