The Future of Capital Markets
a CoinShares work-from-home series
In this week-long series, our team at CoinShares will explores the fundamental technology innovations driving new applications in cryptocurrency markets and how they might apply to capital markets more broadly. We spoke with three technology entrepreneurs building new types of market infrastructure, and our CoinShares Capital Markets desk.
Automating Execution and Trading Workflows
Anand Gomes, Paradigm
Cross Margining through a Distributed Clearinghouse
Darsh Vaidya, X-Margin
Decentralized Settlement Protocols
Sharon Goldberg, Arwen
Insights from the Trading Desk
Jean-Marie Mognetti, CoinShares
Future of Capital Markets panel with our guests
Meltem Demirors, CoinShares
At CoinShares, our mission is to expand access to the digital asset ecosystem while serving as a trusted partner for our clients. We achieve this by building regulated investment products and financial services, including exchange traded products, managed investment strategies, and capital markets services.
CoinShares invests in innovative companies building the digital asset ecosystem, focusing on making early stage equity investments in financial technology companies. Note that CoinShares, associated group entities, or the directors of the firm may be investors in one or more of the companies or assets discussed in this series. We have made an attempt to note instances where a relationship exists between a company and the Group.
Where are We Going?
Over the last few weeks, markets around the world have experienced levels of volatility, turmoil, and pressure that have been unprecedented. The last financial crisis in 2008 resulted in regulation and changes to capital markets and the way our financial institutions and intermediaries in our global financial system function. Notably, I spent much of my early career from 2009 to 2013 focused on the implementation of rules like Basel 3, which set new liquidity requirements for banks and financial firms, and changed how risky assets were accounted for in calculating available capital. From trading firms to dealers to large banks, financial services firms across the market and different parts of the asset management ecosystem have been hit hard by recent market events.
The crypto market hasn’t been immune to volatility, but has held up remarkably well in the face of structural challenges. While the industry is still nascent, and many of the intermediaries in the crypto market are quite young, the last five years have been challenging and any survivors of this volatile and sometimes brutal market have developed robust internal processes to manage the many challenges of a market that is truly global, where assets are highly fluid, that is open 24/7, and where the large volume of trading still happens bilaterally, without intermediaries.
We’re excited to host a week-long event series on the Future of Capital Markets, where we’ll cover some of the fundamental technology innovations driving new applications in cryptocurrency markets, and how they might apply to capital markets more broadly.
As we articulated in our March 13 update to the market, at CoinShares, we have spent a lot of time thinking about the future of capital markets. Many in the market know us as a digital asset manager, but we are much more. Our last seven years of operating in the digital asset market have helped us build trading technology and infrastructure and systems help institutional counterparties meet their unique liquidity needs through a full suite of services. As a leading counterparty with an established track record, our capital markets desk acts as a global access provider around a broad array of instruments with a unique focus on digital assets. CoinShares Capital Markets (CSCM) services include electronic market access, OTC liquidity in spot, derivative, programmatic execution, and other custom risk management solutions. We execute over $200M of notional trading volume per month and act as a major liquidity provider and trading firm in the digital currency ecosystem.
One of the themes for our venture investments is that blockchain technology has enabled a fundamental change in the structure and flow of how capital markets operate, including where trades are executed, cleared, and settled. This evolution of market structure can completely transform the role of intermediaries, and enable new market structures to emerge. We’ve invested in a number of companies who are building this technology, and deploying it in both crypto markets and legacy markets.
Understanding the Trade Lifecycle
What’s been interesting to watch is how some of the features of digital assets and the markets where they trade could inform the future of how this technology and these assets get integrated into broader capital markets. Over the last two weeks, while we’ve seen turmoil in legacy capital markets, crypto markets have been surprisingly resilient, and we’ve witnesses first hand how some of the unique attributes of cryptocurrencies and digital assets have provided a unique edge to managing and minimizing risk, optimizing speed, facilitating new kinds of leverage, and providing fluidity of capital. From execution to clearing to settlement, we’re seeing new capabilities emerge that change how markets are structured and how intermediaries operate. We believe the events of the last month, and of the coming months, will greatly accelerate the use of this new technology in markets from the esoteric, such as digital assets, to the mainstream, such as repos and swaps.
In this series, we'll cover the trade lifecycle from start to finish. While crypto markets may have started out as largely informal and unstructured, the last five years have seen markets become more formalized, more organized, and more sophisticated. At the same time, the unique attributes of cryptocurrencies, the assets themselves, and the networks on which they operate, blockchain networks, have introduced new opportunities in how market participants interact and transact.
The Unique Attributes of Digital Assets
I'd like to share a few observations about the unique features of digital asset markets, which have really been highlighted during this period of market turmoil.
- Markets operate 24/7 – if you get margin called on a Sunday at 2 pm, you can post collateral immediately, or the lender can liquidate your collateral immediately and programmatically based on their risk parameters
- Assets have fluidity – a bitcoin on one platform can be moved to any other trading platform within 10 minutes, and in most instances is tradable within 60 minutes. New prime brokerages and other trading aggregation platforms pool liquidity and can facilitate instant trading across a number of venues and platforms.
- Stablecoins obviate the need to touch banks – the ability to rotate into and out of stablecoins minimizes the dependence on banking intermediaries and cash sweeps.
- New custodial solutions, including self-custody or collaborative custody, enable users to be their own bank and ensure security of assets while still preserving the fluidity and 24/7 attributes of these assets. Because there is not yet hypothecation in the bitcoin system, all assets under third party custody are guaranteed to be available, meaning there are no liquidity crunches like those experienced by money market funds this past week. For those who self-custody, firms have the security and peace of mind of knowing that their assets are always secure, fully intact, and under their direct control. New innovations in multi-sig security allow multiple market participants to hold keys and apply more complex approval logic, while still obviating the need for a central intermediary who acts as a depository.
- Strict collateral requirements - when it comes to lending and collateral requirements, loans are overcollateralizing by 10 – 40%, and margin rules are enforced electronically, meaning there is less need for oversight and intervention. The nature of crypto markets allows the time window between margin call and liquidation to be much shorter than the standard 24 to 48 hours in the repo market, sometimes as small as 3 to 6 hours, and liquidations can happen anytime - whether 2 am on Sunday or 7 pm on Friday.
- Bilateral trading with settlement finality - Lastly, and most importantly, even if exchanges go down, trade execution, clearing, and settlement can continue bilaterally, and with finality, between market participants in either digital currencies or fiat-backed stablecoins.
Over the next week, we’re excited to share what we’re seeing, hearing, and learning, and drive a new conversation. We will hear from three technology entrepreneurs, our CoinShares Capital Markets desk, and conclude with a live webinar. Our goal is to make this series informative, educational, and entertaining.
The Schedule for This Series
|Automating Execution and Trading Workflows
||Video + Blog|
|Cross Margining through a Distributed Clearinghouse
||Video + Blog|
|Decentralized Settlement Protocols
||Video + Blog|
|Insights from the Trading Desk||Video + Blog|
|Future of Capital Markets Panel with our Guests||Live Webinar (link to join)|