What can cryptocurrencies learn from traditional finance?

Lessons for cryptocurrencies from traditional finance.

Author: Joanna Wright, compiled by dlnews, translated by Shanon, LianGuai


Challenges and Hopes for Traditional Finance in the Cryptocurrency Field

Over the years, scandals and bankruptcies have led regulatory agencies to crack down on cryptocurrency companies, making it imperative for institutional investors to have proper safeguards to protect themselves from future failures.

Nicola White, CEO of B2C2, a cryptocurrency liquidity provider, believes that her company can provide some security.

“We hope to become a mature force in this field. Our management team, including myself, has a lot of experience in the traditional financial industry. How can we apply this experience to the exciting and innovative cryptocurrency field and make it work for the cryptocurrency market?” For her, the value of cryptocurrency lies not in currency speculation, but more in how technology can be applied to simplify traditional markets, such as shortening settlement times.

As the industry matures, White says she hopes the focus of regulatory discussions will shift from “the latest cryptocurrencies” to “putting companies or US government bonds on the blockchain, and transparently understanding who is doing what and how the transactions are being conducted.”

Her hopes are not unfounded. The cryptocurrency field is booming due to the so-called “BlackRock effect” – referring to the optimism injected by the asset management company’s application earlier this year to launch a spot bitcoin trading fund.

But these attempts have been cautious. Despite BlackRock and other TradFi giants’ involvement in the cryptocurrency field for years, they approach the risks with caution, such as price volatility, lack of trusted intermediaries, and appropriate anti-money laundering provisions.

Joseph Chalom, Head of Strategic Ecosystem Partnerships at BlackRock, said at the Coinbase Cryptocurrency Summit in June: “If we don’t know who we’re trading with, we’ll go to jail.”

Market structure companies like B2C2 can alleviate some of the fears by acting as intermediaries between clients and trusted exchanges, providing services that meet institutional needs. B2C2 allows clients to access around 30 types of tokens electronically on approximately 20 exchanges and conducts bilateral settlement transactions – ensuring that buyers receive assets and sellers receive compensation.

The company’s clients include local cryptocurrency investment firms, but we are also starting to see more interest from fund managers. White said that in the ongoing client outreach, 40% are from TradFi.

We see that most large asset management companies plan to launch by the end of this year, but they need training. They typically start with Bitcoin and Ether, “and once they get comfortable with the space, they will add more tokens.”

Traditional Roots

White’s background is in traditional finance (TradFi). In 2002, she joined global bank Morgan Stanley through an internship and wrote real-time pricing software for the bank’s mortgage-backed securities business.

Subsequently, as Global Head of Rates at the bank’s electronic markets division, White led a significant initiative in bond trading automation. In 2016, White joined market maker Citadel Securities as Global COO, achieving another breakthrough in automated rate trading.

Benefits of Blockchain

White states that from a market structure perspective, cryptocurrencies have decisive advantages over traditional finance (TradFi). Firstly, the transparency of blockchain provides unprecedented visibility for B2C2’s trading partners. We can see in real-time the trades we are executing with all major exchanges, we monitor their wallets in real-time, and have set up automated alerts to let us know if there are large withdrawals or issues with specific tokens. B2C2 uses tools like Chainalysis and Elliptic to track who our clients are interacting with and what assets they hold in real-time.

Secondly, the settlement process on the blockchain is drastically different. In traditional finance (TradFi), settlement takes two days after a trade is agreed upon, known as T+2. Blockchain, on the other hand, is praised for offering near-instant settlement. To embrace these new challenges, White joined B2C2 in 2021 as President of the Americas office and became CEO in May 2022.

Mature Participants

Cryptocurrencies are still in their early stages, learning from the lessons of traditional finance (TradFi) decades ago.

For example, the collapse of FTX serves as a warning to us, illustrating why stock exchanges are not allowed to hold customer assets – a lesson learned by the stock market during the crash in 1929.

White has witnessed many of these painful lessons firsthand. She witnessed the outbreak of the credit crisis in 2007 from Morgan Stanley’s bond trading desk. She also recalls the Swiss National Bank’s unexpected decision in 2015 to decouple its currency from the euro, causing drastic fluctuations in the Swiss franc’s price and bankrupting many investors. These shock events have prompted traditional exchanges to take measures to protect investors in times of abnormal volatility.

Typically, these measures are enforced by regulatory agencies. For example, the U.S. Securities and Exchange Commission requires stock exchanges to implement circuit breakers, which halt trading when a pricing index reaches a certain level.

However, in cryptocurrency exchanges, these safeguards are not consistent, forcing B2C2 to be cautious in integrating with them. Due to the lack of control, B2C2 may not issue orders but instead provide liquidity on these exchanges.

Real money inflow

For some industry purists, these measures go against the overall goal of cryptocurrencies – decentralization and disintermediation of financial markets. But for White, this is not about shoving cryptocurrencies into the TradFi market structure, but rather applying the painful lessons from the traditional financial world to make cryptocurrencies meet real-world needs. Only with strong institutional participation will cryptocurrencies attract real capital inflows and liquidity, making retail customers more willing to invest.

This is exactly what makes the BNY Bitcoin ETF appealing. If investors can access cryptocurrency ETFs through their Fidelity or Robinhood accounts, it will lower the barrier to entry. The average daily trading volume of U.S. ETFs reached $141.6 billion in the second quarter of 2023. Imagine what would happen if even a small portion of that were to move to the cryptocurrency market?

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