Crypto Capital Markets: The Arc of Maturation

Amber Market Insight

This is a contributing article from Leslie Lamb, Head of Institutional Sales at Amber Group.

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We spend a lot of time thinking about crypto market infrastructure.

The development of market infrastructure is indicative of the institutionalization growth curve. The pace of building in this space has been astonishing. We are seeing the emergence of more institutional-grade market infrastructure from qualified custodians to trade execution platforms and derivatives exchange venues. We believe the more robust the infrastructure, the more investable crypto becomes as an alternative asset class. Institutional participation is really the amassing of retail participation and more retail will come as the building blocks get built. Indeed global adoption will increase at a measured pace (to borrow a popular phrase from the Fed). But as a young, growing asset class, crypto has already proven formidable and is rapidly forging its own path. The question is whether crypto evolves to mirror traditional financial market structures or whether crypto forms its own market structure tailored to the unique needs of the market. 

We ​ see the arc of crypto capital market maturation form over three stages:​      

  1. Growth and diversification of infrastructure providers in the crypto-asset ecosystem servicing the various needs of institutional and retail customers
  2. Consolidation and competition in global markets amongst infrastructure service providers​  
  3. The professionalism of the crypto capital markets and dominance of select sophisticated​ institutional-grade players replacing certain traditional financial intermediaries

Despite the race to the bottom on fees across platforms — custodians, trading platforms, exchange venues — we are still broadly in the growth and diversification​ stage of such platforms.​ There is healthy competition amongst these infrastructure players to create services that will meet the various needs of both institutional and retail customers. One growing trend we see is vertical integration. Coinbase and Blockchain.com are just a handful of examples. These digital​ asset companies started with one product offering (e.g. wallet) and, over time, increased platform functionality to include additional crypto on/off ramp solutions and “yield-capture” services such as lending and staking offerings. At one point,​ Coinbase Custody was the only custody solution on the market that had vertical integration with institutional liquidity and trading services. Then in September 2019 Gemini became a US qualified custodian. Their recently launched captive insurance company will provide additional regulated insurance coverage for segregated assets in​  Gemini’s cold storage. Additional insurance coverage is just one of many demands institutional users have from these diversified platforms. Others include better access to liquidity, better pricing, higher-yielding products, financing — the list goes on. The smart platforms are listening and growing to meet their needs. 

One problem we face in the current trading environment is stale capital flow. We need new​ capital flowing through the crypto capital markets. How do we see this being achieved (and sustained) apart from the occasional tailwind from price appreciation? We think the answer lies in the piping. Since the typical crypto on-ramp gateway is through trading, we will focus on the building blocks of crypto trading.

As of YE 2019, volumes across the 400+ spot exchanges globally reached a total of ~$65B over a 24 hour time frame [1]. The proliferation of spot exchanges has given rise to severe market fragmentation. We call it the more is less​ ​ phenomenon. There are some merits to the growing number of spot exchanges, but the tradeoff to this “optionality” unfortunately means thin liquidity spread across a majority of the exchanges operating today. Spot liquidity seems to be concentrated on the same top few exchanges. 

Building block #1 – Pre-trade infrastructure

The ability to efficiently utilize  balance sheet is a key component to a healthy market. Yet trading in the spot markets is still quite capital inefficient. If you are trading on an exchange, it is standard practice to trade from a pre-funded cash account. This means that you need to put up capital prior to executing the trade. This, along with the exacerbating issue of fragmented liquidity, are reasons why large-size trades are still mainly done via over-the-counter (OTC), where post-trade settlement is the standard. That is not to say that the multitude of other crypto on-ramp channels like aggregators and brokers are not worth exploring. The key is understanding your preference for trading and what you prioritize i.e transparent price discovery (trading direct on exchange); capital efficiency (trading via OTC); security (trading direct from cold storage).

Building block #2 – Trade execution

Aside from lit venues (i.e exchanges that operate central limit order books), OTC venues have increasingly become the predominant channel for crypto-to-crypto and crypto-to-fiat trading. In fact, due to better liquidity access, OTC desks are the preferred venue for executing larger-size trades and liquidating illiquid tokens. Most desks trade bilaterally via voice trading — a manual, hi-touch service between the dealer and the counterparty. The advantage here?

Human-interaction for quotation/customer service. Some like Amber also offer electronic single dealer platforms (SDPs), a low-touch alternative that offers quick and direct access to product pricing via streaming. Our SDP offers a number of advantages: 

  • Multiple trading pairs at globally competitive pricing
  • Capital efficiency with post-trade settlement option
  • Operational efficiency via one-click trading and multiple order types
  • Price discovery via our execution service where we act in an agency capacity
  • Soon, automated access to Amber’s other secondary market services including financing and structured solutions

By creating a user-centric platform, we are changing the way our clients interact with us as an OTC dealer and more importantly, as a company. Amber is not only your counterparty, but also your trusted partner to service your needs anytime – 24/7/365. We recognize our clients are asking for diversified services and believe that our SDP is a critical first step toward a more holistic servicing platform. 

Building block #3 – Post-trade infrastructure 

Lack of proper post-trade infrastructure is unanimously agreed to be the biggest gap in today’s crypto capital markets. As the International Securities Services Association (ISSA) points out here,​ post-trade infrastructure must catch up with developments in pre-trade and trade before mass-market adoption of crypto assets can truly occur. To mitigate credit risk, we need better post-trade infrastructure for on-chain transaction settlement and clearing. 

Clearing

Central Clearing Parties (CCP) are a core part of the traditional post-trade infrastructure.

In crypto, each exchange acts as the direct counterparty, facing clients to clear and settle trades. While certain intermediaries have emerged to solve this missing part of the post-trade process, using third party providers is still not the norm. The industry is waiting for the emergence of central clearing for spot and derivatives to eliminate balance sheets and cross-margin frictions for market participants. But if the way of the future does not include CCPs, could non-custodial clearing services become the status quo to trade across these platforms, or perhaps a hybrid model? 

Settlement (finality)

Settlement finality is a well-defined financial market concept. There are multiple legal and regulatory structures surrounding the clearing and settlement of financial instruments [2]. According to the Bank of International Settlements (BIS)​ , finality of settlement ensures that transactions made overpayment networks will, at some point, be complete and not subject to reversal even if the parties to the transaction go bankrupt or fail. The same concept of settlement finality, taken in the context of crypto and blockchain, opens itself to many questions. Tim Swanson argues ​ that “a public blockchain by design cannot definitively guarantee settlement finality” and that, in fact, it is “self-defeating to build a network that is both censorship-resistant from traditional legal infrastructure and​ ​ simultaneously compliant with legal settlement requirements” [3]. The purpose of bringing up settlement finality is not to go down a rabbit hole of analyzing the best path to reconcile this conflict nor to start a broader philosophical debate.​ Rather, it is to present what we see as a risk unique to crypto trading. Debate aside – assuming proper rails for fund settlement is something that can be achieved in crypto – we see a number of platforms working to bring more certainty to the crypto-to-crypto settlement process.

It is worth noting that these risks around finality are extremely different amongst different blockchains. Bitcoin Gold (BTG), for example, recently was 51% attacked and $76K worth of BTG transactions were “double spent” i.e. reversed. Anyone who was counting on the finality of those BTG transactions is now at a financial loss. This risk is far reduced in top crypto assets with large and secure blockchains or assets that are tokens built on top of historically secure blockchains (ERC-20, SLP, etc). When it comes to BTC or ETH transactions, for example, the finality a financial participant obtains after 10 or 30 minutes is far greater than that achieved in the traditional banking system. This is very different from smaller crypto assets that have their own blockchain, not secured by much hashing power. For those blockchains, finality is much harder to achieve.

There are multi-platform settlement solutions like Fireblocks that now enable digital assets to be easily transitioned from any state of storage and primed for immediate settlement and transfer on the blockchain. Others offer solutions for derivatives settlements like margin calculation and cross-counterparty netting to enable better capital efficiency. Perhaps the most prominent fiat payment rails supporting the crypto trading industry today are Signature Bank’s Signet Platform and Silvergate’s Exchange Network (SEN). According to Coindesk, Silvergate is reportedly looking to support fiat-to-bitcoin settlement services for SEN participants this year. Should this materialize, it would be a positive step forward for the industry. But it will still take time before we see support for a majority of other crypto assets via their settlement service, much less other regulated banks launching crypto banking and bitcoin settlement services. 

Crypto financing and derivatives: Improving risk management and asset price discovery The rapid growth of the financing (i.e borrowing/lending) and derivatives markets has enriched the number of risk management tools available for market participants like traders and miners. It was not long ago when miners had no option but to liquidate from their BTC portfolio in order to pay down operational expenses. Now, by working with firms like Amber, miners can choose to take out cash loans against their BTC balance sheet at competitive rates and put on various options structures to hedge their BTC exposure. We continue to see increasing demand for BTC-backed cash loans, which we believe has unlocked significant capital from the markets. We think increased participation in the financing market will lead to improved liquidity and price discovery across assets. As for traders, retail and institutional alike can now trade perpetual swaps and futures contracts with leverage across multiple expiries, enabling greater capital flexibility. These are all necessary advancements for the crypto capital markets.

We believe it is important to analyze the piping infrastructure that supports the current trading ecosystem. The so-called building blocks form the bedrock for a maturing crypto capital market. As market participants, we are laser-focused on doing our part to build a robust crypto finance platform for our clients. As specialists in the secondary markets, we aim to provide a suite of best-in-class services including OTC, trade execution, treasury management, financing, and structured solutions. 

If you would like to learn more about Amber Group, please say hello to us at contact@ambergroup.io.​ 

About Us

Amber is a diversified crypto finance firm. Our core value is building strong relationships with our​ clients, helping them buy and sell cryptocurrency products, earn yield, manage risk and access liquidity. We operate around the clock and around the globe, with a presence in Hong Kong, Shenzhen, Seoul, and Vancouver.

Sources

[1]: Coingecko. 2019​  Q4 Report 

[2]/[3]: Tim Swanson. Settlement Risks Involving Public Blockchains.​        

  • […] 加密货币市场整体体量的增长仍需更成熟的市场基础设施建设,来吸引更多的资金和机构入场。数字资产机构服务商 Amber Group 认为加密资本市场的成熟之路分为三个阶段:增长和多元、竞争与整合、专业化及行业龙头效应,当前市场处于第一阶段,有向第二阶段发展的趋势。原文标题:《Amber 观点:加密货币资本市场如何迈向成熟之路?》(Crypto Capital Markets: The Arc of Maturation)撰文:Leslie Lamb,Amber Group 机构销售负责人对于加密货币市场的基础设施建设,我们进行了大量的深入思考。加密货币市场的基础设施建设是整个行业机构化的先行指标,而当前市场基础设施的建设速度非常惊人。从合规的托管方、到交易执行平台、再到衍生品交易所,我们正在见证机构级别的市场基础设施的蓬勃发展。这个基础打得越牢固,加密货币作为另类资产投资标的将更容易被广泛接受。投资机构逐步参与这个市场,是散户参与度积累到一定程度的结果,而更多基础设施的建立,将进一步吸引和提高散户的市场参与度。借用美联储对此的评价,「全球范围内 (对数字货币) 的接受度将加速增长」。作为一个年轻的、迅速发展中的资产类别,加密货币已经证明了其强大的生命力,并正在迅速开辟自己的道路。剩下的疑问是,加密货币发展出的市场结构究竟是会映射传统金融市场的结构 ,还是将根据其独特的市场需求演化出不同的最终状态。我们认为,加密资本市场的成熟之路分三个阶段 :尽管当前在从托管商、交易平台、交易所等细分领域的竞争都充满了激烈的价格战,我们仍大致处于增长和多元化这一阶段。健康的竞争环境将促使这些基础设施提供商去创造能满足机构和散户诸多需求的服务。一个逐渐明显的趋势是垂直整合。从诸多例子中,以 Coinbase 和 Blockchain.com 来说,这些加密资产平台由原先的单一产品 (比如钱包) 起家,随着时间推移逐步拓展出包括法币入金、通过借贷和 staking 生息等更多功能。Coinbase Custody 曾一度是市场上唯一纵向整合了机构流动性和交易服务的托管解决方案。然而在 2019 年的 9 月,Gemini 成为了美国合规托管商,他们最近成立的专属自保公司将为 Gemini 冷钱包方案的托管资产提供额外的受监管的保险。保险覆盖只是机构用户对这些多功能平台的众多需求之一,其他需求还包括更好的流动性、更优惠的定价、更高收益的产品、融资借贷服务等等。聪明的平台商会尽量去听取这些客户需求,并发展业务以满足客户们的需求。在当前的市场环境中,一大问题是资金流入的滞缓。加密货币市场需要新的资本入场。除了偶尔的价格上涨吸引一下眼球,加密货币市场该如何实现吸引和维持新资金的流入呢 ? 我们认为答案在于通道。既然加密货币的资金流入通常是出于交易目的,那么我们重点关注加密货币交易基础设施的模块构建。截至 2019 年末,全球 400 多家现货交易所的累计全天交易量到达了大约 650 亿美元 1。现货交易所的数量暴增导致了严重的市场分化,我们称之为 「more is less」 现象。现货交易所数量上的增长带来了一些好处,但用户面前太多的选择导致大多数现货交易所的流动性都很分散薄弱。当前的现货交易流动性似乎集中于少数几个头部交易所。在一个健全的交易市场,交易机构通常有办法高效利用其资产负债表。然而,当前数字货币现货市场的交易资金利用率十分低下。在现货交易所交易的标准做法是在已有资金沉淀的现金账户里进行交易。这意味着你需要在交易开始前就投入资金。再结合支离破碎的交易流动性,迫使大宗交易倾向于通过场外交易 (OTC) 而非在交易所场内进行的原因 (场外交易通常是交易后结算)。当然,这并非是说类似于聚合交易平台或者券商作为加密货币市场资金入场渠道的探索一定行不通。关键是你得了解自己的交易偏好和侧重,到底是透明的价格发现 (直接在交易所交易),是资金利用率 (通过场外交易),还是绝对的安全性 (直接从冷钱包交易)。除了中心化撮合的交易所外,场外交易日益成为币币交易和法币交易的主要渠道。由于有更好的流动性渠道,场外交易商是执行大宗交易和交易流动性较差的代币的首选场所。大多数场外交易商都是通过传统的人工对话协商进行双边交易的,那其优势在哪里呢 ? 或许是提供报价或客服时的人际交流。而一些公司,比如 Amber,提供人工报价的同时也提供其独家电子报价平台,通过自动化报价提供更直接实时的交易服务。交易执行后的基础设施缺乏是当前加密货币市场最大的空白,这几乎是行业共识。正如国际证券服务协会 (ISSA) 所指出的,在加密货币被市场广泛接受之前,交易执行后的基础设施必须跟上交易前和交易中的建设水平。为了降低市场的信用风险,我们需要更好的交易后基础设施来进行链上清算和结算。中央对手清算方制度 (CCP) 是传统市场上交易结束后的基础设施的核心部分。在加密货币市场,每个交易所充当了客户交易的直接对手方,直接面对客户进行交易清算和交割。尽管行业内已经出现了一些中间机构试图解决这一环节的缺失,但真正使用第三方清算的依然不常见。行业仍在等待现货和衍生品的中央清算,以最终消除交易者在资金利用率和保证金上的大量重复浪费。但如果这个行业的未来真的没有中央清算的一席之地,那么第三方非托管的清算服务商是否能为跨平台交易提供清算? 或者有没有一种混合方案来解决整个清算流程?最终结算是一个明确的金融市场概念。关于金融工具的清算和结算存在着多种法律和监管结构 2。根据国际结算银行 (BIS) 的说法,最终结算确保了通过支付网络进行的交易,将在某一时间点被完结,那时即使交易参与方破产了或者无法运作了,也不会逆转交易。而这同一概念,在加密货币市场和区块链行业里,同样引人深思。Tim Swanson 认为,「公链在设计原理上就无法保证结算的最终性,因此想建立一个既能抵御中心化监管,又能符合传统法律意义上的最终结算的网络,是自相矛盾的」[3]。我们这里讨论「最终结算」的概念, 不是为了在这场哲学辩论里面越陷越深,而是为了突出加密货币其特有的这种风险。撇开这个辩论不谈,我们看到许多平台在作出增加结算确定性的努力。值得注意的是,不同公链的结算风险有天壤之别。例如,比特币黄金 ( Bitcoin Gold,BTG) 最近遭到 51% 的算力攻击,价值 7.6 万美元的 BTG 交易被 「双花」攻击,交易被逆转。指望 BTG 交易最终结算的持有者遭受了亏损。这种风险在大型的、安全的顶级公链上,或是构建于这些安全公链 (ERC-20、SLP 等) 上的代币资产就大大降低。以 BTC 或 ETH 为例,在这两条公链上交易时,在 10~30 分钟内获得的结算确定性和金融体验远远优于传统银行系统。这就与那些自己搭建公链又没有太多算力维护的小型加密资产截然不同,其区块链上的最终结算更难实现。市场如今有了像 Fireblocks 这样的多平台结算解决方案,使得数字资产能轻易从任何存储状态转换,为链上的即时结算和转移做好准备。还有一些基础设施为衍生品提供结算解决方案,比如保证金计算和跨平台净额结算,以提高参与者的资金利用率。如今支持加密货币交易行业的最知名的法币支付渠道是 Signature Bank 的 Signet Platform 和 Silvergate Exchange Network(SEN)。据 Coindesk 报道,Silvergate 希望今年 SEN 能为客户提供从法币对比特币的交易结算服务。倘若果真如此,行业结算基础设施将更进一步。但距离他们能提供其他大多数加密货币的结算服务还需要不少时间,更别提其他受监管的银行推出类似结算服务了。融资 (即借贷) 业务和衍生品市场的快速增长,丰富了交易员和矿工等市场参与者的风险管理工具库。尚在不久前,矿工们除了变现 BTC 来支付运营 费用外别无选择。而如今,通过 Amber 等公司的服务,矿工们可以选择以极具竞争力的利率来抵押 BTC 借贷现金,并可以用各种结构性衍生品来对冲其 BTC 头寸。我们见证着 BTC 抵押借贷的需求不断增加,这已经为市场释放出大量资金。融资借贷业务的发展增强了市场流动性并提高了市场的价格发现机制。对于不管是机构交易者还是散户来说,杠杆交易永续合约和期货也撬动了更大的资本灵活性。这些产品都是加密货币市场所需的延伸。我们认为,分析当前交易生态系统的基础设施建设至关重要。以上这些基础设施的构建模块是搭建一个成熟的加密货币市场的根基。作为行业的一份子,我们致力于为客户构建一个强大的加密货币综合金融服务平台。作为二级市场的专家,我们的目标是为客户们提供一流的全方位区块链金融服务,包括场外交易、交易执行、资管理财、融资借贷和结构性衍生品。参考文献1 Coingecko. 2019 Q4 Report2、[3] Tim Swanson. Settlement Risks Involving Public Blockchains.来源链接:globalcoinresearch.com […]

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