From Fragmentation to Flow: The Playbook to Onboard the Next Era of Institutions

Transcript

So we are heading into the last panel before we head into the lunch break and uh Frederick spoke about how actually the current system looks like and we just adding on modules and it's fragmented and guess what in our next panel this is exactly the topic from fragmentation to flow and the playbook to onboard the next era of institutions because they are here they want to be part of it. But how do we on board them? So um in this panel we got Paulo from Bindi who will be moderating and the floor is yours and I'll allow you to introduce your panelists. Please put your hands together.

[Applause] Good morning everyone. Can you take a picture at some point? You mind? Thank you so much. Here we go. I mean the previous panel we had like uh three successful bank that have integrated digital assets. So let's try to uh not to be too pessimistic. Um but uh I think it's a fact that uh you know we are still facing a lot of challenges a lot of uh um limitation for institutions to adopt digital assets at a scale. So maybe let's start with a with a short introduction. Um, you want to start? Absolutely. Thank you, Paulo.

Hello, everyone. I know it's hard. Thank you for being with us. I know we're competing with lunch, so it's not easy. Uh, my name is Elod and I'm chief operating officer at Kao. Um, Kao is the leading data solution provider working on market data analytics for risk management and indices. Thanks Paulo for uh and thanks for being here. My name is Frank. I'm running sales for Telos uh in EMIA. Uh for people who don't know us, we're the institutional create technology provider providing uh all kinds of technology services for people who interact on the digital asset ecosystem. Thank you. Uh my name is Katrina. I represent Winimute with a global leading market maker and OTC desk have been founded in 2017 and prior to crypto I spent 15 years in traditional finance

covering institutional clients. And hi I'm I'm Jonathan Mthi from G20. I'm one of the co-founders and head of trading there. Uh we're a cross asset trading firm focus on derivatives. Uh we trade in FX and commodities and also digital assets. Thanks. Institutional normally um talk about fragmentation as a kind of like barrier to enter and adopt digital assets uh you know across um exchanges blockchain technology standard. uh maybe let's start with you already like how do we see that and is it really true that fragmentation is uh uh somehow preventing institutional player to enter

into this industry. Yes, maybe before we talk about fragmentation, let's just take a step back and understand why is fragmentation really so crucial and a barrier to entry of institutional players. I'm sure you all heard about, you know, how blockchain can enable better, faster, cheaper capital markets to reach to the 16 trillion uh opportunity by 2030. The thing is to get there. Yes. However, fragmentation is standing on the way because we think of as you said today, you have some barriers to entry. For example, if you're an institutional player and you have to deal with multiple blockchains, multiple exchanges, centralized, decentralized, you have different wallets, you have different interfaces.

All of that brings actually the opposite of what the blockchain is promising basically making more uh complexities, more intermediaries in some ways and more risk counterparty risk and all of that is doing one thing. It's actually bringing liquid liquidity down and I think everyone in this room can understand that if you don't have liquidity markets cannot grow. So I would say that today fragmentation is definitely a barrier to institutional players entering the space. We're seeing however even if I mentioned that you have the the fragmentation on the blockchains on exchanges on liquidity um also I mean collateral management because if you have several place to trade it means that you have several prices if you have several prices it means that it's hard to know what's the value of an asset um and all of this has implications um on on a lot of different

uh stances however on a positive note we do see some convergence I would say um I'm sure you heard of some of the bridges with wormhole layer zero chain link CIP, CCIP for example. Um we're also seeing some custodians as well enabling more mobility across assets across chains. We talked about interoperability new standards. So we do see some convergence. However, the fragmentation I just introduced the topic with is still very much present. Um and we need each of us in the room to to work towards that in order to on board more players and more liquidity at the end of the day. Yeah, very good point. Maybe Frank, I mean you spent a lot of year working with uh institutional players, banks to integrate u you know digital

assets, cryptocurrency in their in their products. Do you see any meaningful progress like are we doing some progress like things are getting better or we are still adding uh complexity for them? Um I do think we're still adding more complexity in all honesty. uh in all honesty it keeps us also uh at work because that's the the the layer we want to bridge and uh make sure that let's say all the fragmentation can be seamlessly interacted on all the institutional players uh but yes we're far from conference at the moment in all honesty I think uh uh things are progressing but even take a look on all the different protocols out there right I mean if it's on blockchain or even let's say on fixed

protocol websockets rest API uh uh decentralized uh uh on-prem off-rem I there's so many elements there which let's say makes it difficult for uh participants let's say to interact seamless within the ecosystem uh but yeah we're we're building on it and I think uh helping the industry to understand let's say what's needed to get to that phase hopefully then institutional adoption will follow yeah I mean if if we look like a traditional finance uh something that uh um it has been already solved now since here is market data I mean traditional payers they rely on uh very um unified with high integrity data market market data.

Uh maybe because this is exactly what what you're doing on a daily basis. Um how do you see like and why we cannot uh uh reach that point where everyone can work on the same standard uh regarding data? Yes, maybe I can start going back to the today you have a fragmented market and when you are any type of market participant so regardless like you're a trader from a buy side or you're a bank or you're a regulator or your custodian or a payment solution anyone throughout the investment life cycle need data and today it's hard because you have all the everything that's happening offchain and so that's the traditional API websockets then you have everything that's happening onchain but you have different protocols different programming language so if you

want to extract all this data then You also need to basically apply to a compare apple to apple. You need to retroengineer some of the protocol to understand how they are built. So you have complexity at different levels due to that fragmentation. So that's one thing that we're seeing at least like all participants to make investment decisions to also look at monitoring and surveillance. Um if you look at uh custody, we talked about collateral management a bit earlier. Basically, if you want to do some uh lending, you need to have a price that everyone agrees upon. If you're a custodian, you have your asset under custody, guess what? You need a price for that. If you are um a fund, if you want to show to your LPS that you made money, you also need a price for that. And guess what? Today we don't have a standardization. There is

not single bitcoin price. When we talked about, oh, Bitcoin, you know, crossed another all-time high, 112,000 from which exchange, you have 130 different ones. And today, that's still a challenge that we see in the market and that we're solving for to bring standardization. Today we can provide prices for spot derivatives for ETF ETPs um all across the chains to bring more you know seamless operations I would say um but that's still I mean today one of the key thing as everyone talked about stable coin as like the killer app I think that pricing for collateral management when you talked about you know composibility and really unlocking all the power that blockchain means um you need to have one price that everyone agrees upon and that's one thing that among other things we do you know back

testing and all the of the things that we can provide pricing and have everyone on the same page is key to um enable the growth of the ecosystem. Yeah. I mean Katrina like from your perspective um winter mute is is is a key player here like how do you deal with the inconsistent market data uh because I guess that's uh heavily affect your business and also how to do do you like mitigate that risk of dealing with different data sources? I mean we had to build everything from scratch right so when the company was born literally at the kitchen table then transferred to wave works everything had to be built as a proprietary infrastructure so our market data we're currently integrated

with 65 plus venues across D5 and CFI so everything was uh built you know in a proprietary manner the same um if you look at there I agree with what LD is saying that the market is fragmented but actually we thrive on that right we welcome decentralization we don't want any exchange or any player to become too big to fail. Uh and we feel that you know it's very important to rely on ourselves. So we have our own API API ST we have our own you know market data and we feel quite often when big institutions and we cover you know ETF issues custodians banks all of the biggest players when they come and say hey I want to do this block size what are you referencing your spread against?

We're like it's against our theoretical price right because we believe that that's the most representative. Um and then we add the spread based on where the market is. So from our side I think we're almost again going back we were just discussing before the panel you know some of us come from a fax background you know some of the banks were almost effectively running their own dockp right they had so much data collection so much trading um interface they could internalize it all and hence they were able to provide the most competitive pricing that's effectively the role that winter me is playing now we trade you know 20 30 billion per day probably singledigit billion on the OTC market so again for us providing pricing from our pricing engine into you know largest exchanges and getting 40 50% market share versus providing it to the

largest OTC retail brokers banks institutional players it's the same pricing right and it's based on a very very accurate source of market data which is going back to your question yeah yeah interesting and Jonathan u the other day when when when we talk uh you mentioned something interesting you said that uh uh the way that you see uh the the current market it remind you the early day of uh FX. Um why is that and what can we learn from these days and you know uh prevent the same mistakes?

Sure. Sure. Um so I think the um the really interesting thing about crypto is that we get to see the infrastructure and liquidity build up in a completely new asset class. And um for those of us who come from a traditional finance background, it's useful to use the journey that we saw there as a template for what could happen in crypto as well. So as an example in FX in the early days, um maybe 20 years ago, showing my age a bit, but um the the trading flaws in the in the large investment banks who were the liquidity providers were um very big, lots of traders, everything was manual, it was very noisy. Um, and that's very different to how it is now.

Um, now there's a lot of volume. It's very liquid. It's quieter. Um, everything trades electronically. Um, and it's very efficient as well. In the old days, you could potentially manually arbitrage. Um, these days it's all handled via very sophisticated um, algorithms. So, I think that same sort of transition is going to happen in crypto with um, many of the the key milestones also happening as well. I think we've gone through the equivalent of a GFC um in 2022 with FTX going under and many other liquidity providers going under. And I think um there that taught us a lot about trust in the in in the market and and how you really can't trust anyone.

You've got to be um uh careful about everything, which is the same lesson that was learned in Tradfi. Um I think the other things that are going to change is that they're going to be more liquidity providers in the in the market. In Tradfi, we there are at least 30, potentially more offering the same service in the market, but in crypto, there are very few. There's a handful of people that you can trust to show good liquidity and be there for you. Um, I think the other thing is is about derivatives. I think that's a big deal as well. Um, a lot of the liquidity that comes in trades about six trillion of volume that trades every day. Um a lot of that comes from the supply of V like from many different um uh wealth management banks and and

things like this which help create order books suppress volatility and provide uh liquidity to the market. That same thing will happen in crypto as well. I think it's largely nent in altcoin markets but it's doing pretty well in in in Bitcoin and Ether right now. And I think that we've seen a trend lower of volatility which is what you'd expect to see from a a maturing market. So I think you know these kind of things will will be milestones and help um improve liquidity in in uh crypto as it as it develops. Interesting. Maybe can I just go back you said Katrina just on you know like the the pricing because I feel that sometime it's something that's a bit overlooked um is today pricing is not you have several methodology you know

like in terms of the how you calculate the price and you need to have outlier management and basically it's not just looking at all the trades and I just want to anchor that because I feel that it's a hidden threat that we all face if you don't have proper pricing then the the rest you know like waterfalls I would say and just one thing is what we have seen At least we've compared like several methodologies from mathematic standpoint and we cannot just look at all the liquidity that's out there and aggregate it. You need to go into like way more depth and there are some outlier management and especially in crypto it's super volatile and you have had several crash right with FTX and others. You cannot just take prices aggregate them and deliver it back. I think you need to go one step further

and that's why in our opinion like you know you should definitely have a partner um into how you do this and it's just like one thing that you know you mentioned to it it seems super easy when you said it and it's something that it's uh I think a bit overlooked sometime today and as we see more maturity at least like we've seen more clients going into the market and asking for more specifics and really doing some you know like testing and really looking at okay when there is a crash like you have some of the pricing methodology that will actually have a very big price difference even for Bitcoin um And so it's something that everyone I mean if you're part of that ecosystem in traditional finance spends a lot of time and energy and I think crypto should be the same and something we need to learn

from traditional finance. Yeah, I guess Katrina you agree with that as well on Yeah, absolutely. Yeah, I do agree with that and I almost feel like you know sometimes when people come and say what was the law of the day we would not go and say well look at this exchange or that exchange right like again for us the exchanges the way we see them some of them have been obviously you know very very competitive um in terms of you know the offering and but it's a multitude of offering right so coming from an institutional background I worked five years at credit Swiss I used to be proud of here it seems to be only only managed in the kind of negative connotations again any institutional uh approach is you know when they come to us initially they say hey guys like we're looking to start we were going to

start with a one-stop solution right because you don't we kind of want to try it right like you know deep outdoors in the water but then later on they realize they don't want to face an exchange that potentially has a custody that has an OTC desk that has a prime that has a that has you know all sorts of offerings which would never happen in trafire right you can't imagine a prime broker also running their own exchange right that's not just it's a misnomer so hence with times they realize okay we've tried it we've tested it our compliance is comfortable we've got all the box is ticked. Now we want to optimize. We need a professional, you know, market data provider. We need a professional, you know, API provider. We need a professional, you know, liquidity provider. We need to also optimize for margins. And that's when they that's

when it goes to the next institutional level. And that's where we're the key player. Sure. So quite often that conversation starts very early on where we're kind of almost holding their hand and saying, okay, this is how things work in crypto, right? You have to figure out the inventory. You have to figure out how you're going to transfer from one exchange to another, right? So even if the market data is tell you you know buy here uh sell there you can't very easily transfer that inventory unless you have automation of that inventory transfers right that's the biggest hurdle because again there's no prime brokers there's no kind of proper you know cross margining and netting so all of that is being built in the background you know with some of the with some of our partners with some companies we invested in but when it

comes down to kind of making it an institutional um kind of space it is still a long way to go outside of you know majors yeah for sure it's actually funny right because uh we took a decades let's say to standardize the workflow in FX and actually we can learn from that at least what we think so everything is let's say overfix or even on binary and what we do in a new digital asset class we go back to websockets and rest API so it's it's quite interesting to see that even think we can leap frock let's say on what we've learned over the years there's still some challenges to come to that point and but I agree to Katrina as well I think the the biggest uh hurdle as well the the credit element right I mean we saw in effects if you take make

the the that that let's say an energy in in a comp comparison to crypto I think uh as soon as we have let's say a prime broker or a proper credit intermediary then we'll see proper institutional adoption and then we'll have let's say more people coming into this arena yeah and and I guess from Talo's perspective like you're really trying as a technology provider to kind of like mitigate all these challenges 100% I mean yeah that's that's our bread and butter right so we we try to work with all the participants make sure that we or let's say that that that layer on top of everybody to make sure that you can seamlessly interact with all the participants but even then it's sometimes a challenge right in uh like I said legacy systems even in our digital assets ecosystem talking about

websockets rest API fragmentation it's uh it's still a challenge to get it all under one same uh bucket but again I think ju just to add to that as well like in in the in the trades in FX we used to have this idea of of wrongway risk which was the fact that you're facing a counterparty that may not be there anymore. And it's one of the challenges in crypto and also in FX to some extent is that you don't really know your position. You you may think you have um a hedged position on different venues, but really all those prices could be completely different.

They may not be the same thing exactly and you may not have one of those legs. Um so like you said, the the credit intermediation is a very big deal once once you can have a pretty much guaranteed equivalence. That's a massive deal for everyone. Yeah. Yeah. And Katrina, you said something interesting before. You said that uh uh I mean nowadays you have like exchanges that are doing basically everything from you know OTC custodians and I mean this is a setup that would be unthinkable in traditional finance. Um the question is why we end up in this situation and is this like vertical setup good or bad for institutional players that are entering the space. Oh

it's a loaded question. I have to be careful. I mean exchanges are our partners right? So we need exchanges. Exchanges need us. We're one of the largest market maker uh for many of these exchanges and we also support the RFQ business. So quite often they would have kind of like a retail converter type style you know distribution which is very akin to retail brokers um you know the trade CFDs and trad um I I guess it's not good or bad it's just a it's the state of the market right so the way that the exchanges were built originally they were welcoming every players right you know me as a retail player I even tried to on board with different exchanges some of them didn't even ask my KYC right like I could just go in with my Gmail account set up with others you know I was restricted due to

UK location but I could use my alternative passport and kind of you know have some kind of checks waters on offering and many of them are catering for the retail um kind of demand and I think that's kind of how originally many of them started right and then because the retail demand was so attractive from market makers perspective right of course we want to you know price the retail uncorrelated one directional flow right so many of the market makers started plugging into those exchanges to provide the you know where there's demand there's going to be supply right and some of them I guess grew So kind of very gradually to become solid institutional players, right? Where you you know they have good solid you know uh regulatory frameworks, they have compliance frameworks, they have proper you know tier one venues in terms of

where they incorporated. So similar to us when someone comes and says hey win we want to trade with you how are you comparing to exchanges? We say well for many of these so-called exchanges you're actually facing an offshore entity. You have no idea about their financials. They will never share it with you. It's a very very kind of non-transparent process, right? With us, we're UK regulated, we're UK registered, we have three billion balance sheets. So from a counter party risk perspective, it's much easier to face us than many of those so-called exchanges, right? It's kind of mainly many of them are integrated brokerage houses effectively.

Um, but then again, there are some exchanges who are trying to do it right and we almost it will be interesting to see how the space developing, right? You have seen some exchanges now talking about getting banking licenses, right? Then it could be possible that they grow into a kind of the space where the exchange is used as a banking partner uh where you know you use it for all of your transfers. You know you have your pay ID, you have your unique ID, you use it for custody, you use this for all of your operations. You have a card that is issued by an exchange right so it will be interesting how the space evolves. I constantly have to challenge myself on my trouty bias to say that is that this is the things that done in trfy doesn't necessarily mean it has to be done that

way in crypto. you have a lot of you know Silicon Valley engineers coming and you know and reimagining the space. So I think we just need to welcome whatever comes that way and just make sure we do it with integrity and ethically and be able to compete. That's why we for instance only compete in one lane execution only. We would not do custody. We are not managing anyone's money. We're not an asset manager. We're not a hedge fund. We're just purely competing on execution. That's our strength. And I think for proper institutional players that's important from a risk diversification perspective. Do you agree Ludy or I would say yes. I I like how you say basically let's say the best of crypto when there is a a lot of innovation being fostered by digital assets let's leverage that and it's true that it

makes it easier right if you have everything in one place however coming from traditional finance background I do see like there a lot of risk and uh that's why I would say I've been maybe a bit more moderate uh than you Katrina on that sense it is I mean you have like some you know potential risk with fronting or misuse of assets if you're both a custodian and a broker uh I would say I see the risk and if you look at the history of finance we have seen a lot of you know um hacks let's call it this way um so we should also not forget about that so while I do think that this can fuel more innovation and remove some of the friction which you know we have in traditional finance however we should also not forget that a lot of hacks and

a lot of money has been lost and at the end of the day you know it's the usually you know small uh players that are impacted I would say um so I would think that we should go towards more separation just to keep everyone's in check. Uh it's also what institutions known of right and familiar with. I mean you have the brokers, you have the execution things, you have the credit, you have the settlement. So it's quite easy for them to understand let's say that from a market perspective and how that would interact let's say with our ecosystem. But um yeah, I think that makes it much more easier to understand. I think also with the uh exchange mix as well at the moment you have a real spectrum of very high quality exchanges all the way to some uh lower quality exchanges um the higher quality

exchanges I think they're becoming more regulated and and and better structured but that is causing them to slow down in terms of things like listings and and new products on the exchange and that may actually lead to more fragmentation as the others who are going to market end up going to the smaller exchanges. which may not have as much um structure and and and protection for users. So I think that's definitely a challenge that is happening at the moment. Yeah, definitely a good point. Uh I mean today we heard few times uh talking about tokenization tokenization of real world assets. Um and I mean I think that the hope was that was somehow like the the

bridge uh um uh between traditional finance and digital assets. Uh but we are still like lacking secondary market and and other you know re relevant infrastructure. Maybe Frank, how do you see that? Like is this like because we are lacking you know regulatory clarity technology uh to allow institutional player to actually uh trade and settle uh uh uh tokenized uh real world assets. Yeah, I think you you you pointed out right. I think the lack of a secondary market is key, right? I mean tokenizing anything is very easy and possible today. Depends a bit where you are and what you want to do with it. But how can

you make sure that you can interact on it? How we can trade on it? Where can I settle it? Uh who are the participants? Uh uh does it speak to traditional finance systems, back office systems? Uh and again even then just think about for example ice and codes. I mean what we know from from traditional finance, right? I mean how can we make sure that when I tokenize uh my water bottle that everybody knows that this is this water bottle and not the water bottle on my left hand side. So I think there's a lot of work to be done. there are good initiatives happening particular here in in Europe. Uh but I think takes a lot more time I think for that being settled and clear how that will work. But yes tokenization is a buzz word but the true adoption and things for institutional

players to actually work on it with the exception maybe forms some money market funds who are being tokenized stuff like that. I think it's very early days. Jonathan, do do you see it in the same way? Yeah, I think so. I think um one of the things with with this which I think um um was already alluded to was that there has to be demand from um some part of the market from these institutional players. When there's demand there's likely to be some spread crossing and as a result then liquidity providers will come in to uh show that market. At the moment, I think it's still very early days like um like it's been said and and it's um there's not that push from the from the demand side as yet to cause that liquidity to come in from the liquidity

providers. Yeah, Kine Lod, you want to add something on this topic? Maybe one thing or go ahead if you want. I'll go. Yeah. Um I mean we welcome their um kind of 247 market because we're already geared towards it, right? I think uh what we seeing and that could be quite an interesting opportunity for cryptonative market makers because quite often when we kind of even you know we know friends you know in HFT space and drive for them 24/7 is a big leap from going from 245 where the market close obviously on a personal level you know life work balance that's not ideal because you have to be plugged in all the time but we already built the infrastructure for that type of you know 247 coverage so I think as um as mentioned once there is demand and we

will see there's volume it's a volume game it's going to be volumes and we see you know more equities being traded on Saturdays and Sundays why not we'll be there to support it if there is demand for sure which is gives you extra opportunity to potentially monetize that flow so yeah I think we welcome all of their innovation provided there's real demand as opposed to supply being created without the demand following but I guess it's just kind of there's always kind of a little bit of that time lag right where you know we see a lot of their exchanges already you know announcing tokenizing equities and they probably seeing it as the next big leap because it allows them to add extra two days out of five days that is no one usually catering for. Yeah.

Yeah. I would just add one thing on that is I mean I agree with what you said basically it's like we need to I think tokenization and we'll see more demand once we have use cases that actually solve for a true challenge. Sometimes I've seen like a lot of PC's um which are more you know it's interesting to tokenize X Y and Z but if there is no real challenge that this is solving I don't think we'll see traction. So regardless of definitely there's still some fragmentation like we need to solve for infrastructure play there's still a lot of things to do on that on like price discovery on the on rent offramp how do you go you know move assets across chains there's still all of that to solve but I think the most important is to go back to what is the actual

challenge that's being solved um and we've seen it like some of the tokenized product money market funds tokenized deposits recently in Hong Kong um I think we'll see some tractions where there's an actual challenge to be solved regarding the geopolitical and macro we're in today. Yeah. And and do you believe like this is like more like a geographical uh limitation? I mean Switzerland um I mean we have seen like several banks uh starting to to adopt uh digital assets while like European Union is lacking behind. Uh is this this due to like uh um unclear regulation or just like different requirement from uh um the local

players? I don't know Frank maybe you're working with like I think you see some uh some some PC's right happening right now in different jurisdictions uh uh and where let's say local regulators are trying to find out what's the best way forward but I think if you're really talking about tokenization you cannot do it on on a local scale it should be more on international scale to make it similar for the institutional adoption they're used to trade on a global scale so I think there will be some limitations there but we have to start somewhere there. So let's hope that this will play out in some nice proof of concepts where people are really get familiar with it and from there we can build on on a bigger ecosystem. That's at least my point of view. Yeah, maybe one last

question. Um if you have to identify like one big unlock that would enable the next wave of institutional adoption, what that would be? uh and uh maybe is this unlock something that you and your company is working on uh who want to start happy to start. Um I think uh institutional players would like to see that crypto will come to them. What I mean by that they are want to let's say have the seamless integration understanding let's say to that they can talk to the internal systems to access let's say our infrastructure. So I truly believe that for institution adoption besides credit which we already touched

on I think it's key that they are familiar with seamless integration and then from there have uh let's say the ability to interact I think one of the other points is capital efficiency um in trad brokers which give you a large leverage on a on a a smaller amount of capital um that's quite difficult in crypto because of the fragmentation. So I think once we have um more products available on let's say the CME or on uh other venues uh like that there'll be a lot more adoption.

Hello. I would say trust. I mean what everyone wants today and that's what we're all I think working towards is you want to know that your assets are safe. You want to know that your trading is transparent and you want to have clear rules. And I think we're you know all working towards those three angles and everything we talked about kind of you know fulfill or uh work toward that but I think if we manage to get trust um we'll we'll see more liquidity in the market. I last I think what we are saying biggest our biggest focus on is um structured products and kind of more exotic type of derivatives. We definitely see that institutions are used to trade and you know speak in those terms. So for sure I think that's a space that needs to evolve as well as you know the interilla market to be able

to hedge and you know do size meaningfully. Um so yeah we're welcome to that. Perfect. All right we are running out of time and everyone is waiting for us for lunch. So thanks thanks a lot for being here and uh I guess you can find all the panelists uh later today uh going around. Thanks everyone. Thank you both.