What crypto markets need to prepare for institutionalization now

Cryptocurrency markets have evolved rapidly since the emergence of bitcoin in 2009. From Ethereum to Litecoin and Chainlink, among thousands of others, crypto assets have found their way into the arms and portfolios of many retail investors. Crypto markets are increasingly eyeing expansion beyond the retail community and into the institutional realm as a key component of their growth strategy. To gain the trust of desired regulated institutions, crypto markets must prove they can meet the heightened requirements and due diligence inquiries of their investor base with ample technology, controls and processes to protect investments. In our experience, both as a market operator and provider of market infrastructure technology at over 130 marketplaces worldwide, two of the most critical areas to address are the operation of reliable and scalable infrastructure and maintaining orderly markets with the utmost market integrity. As the crypto asset macro environment evolves with impending regulation and fluctuating periods of high volatility, the time is ripe for crypto asset markets to prepare for institutionalization — the participation of banks, broker-dealers, payment providers and more — to safely capitalize on the environment and safely grow and scale with the heightened demand.

Reliable and scalable 'exchange-grade' infrastructure

Different from equity markets, crypto markets are almost always on, with many trading 24 hours a day, seven days a week, 365 days a year. As investors can access the markets at any point in time, it is critical that the market infrastructure can support the ebbs and flows of the crypto market — whether there is an influx of new users or a market-moving announcement — at any point in time. Always-on market access combined with highly volatile market conditions can threaten a systems integrity if the technology is not designed and built to scale in order to handle large volumes and transaction throughput at the speed required by the market. Market downtime not only affects the exchange health, but also risks the health of institutions and their customers' investments. Thus, leveraging trading technology tailored for large volumes of orders with a redundant, scalable infrastructure is a must.

Several crypto exchanges are using Nasdaq's exchange technology to meet the needs of retail-oriented markets as well as markets designed to cater for low-latency institutional trading models, while also benefiting from the flexibility to innovate with introduction of new asset classes as they evolve. Bitstamp, for example, implemented Nasdaq's technology in 2020, finding that the upgrade "imparted a clear change in the capacity to handle a large number of trades over a short amount of time." In fact, there was a "reduction in the autocorrelation of the 6-second returns occurred between two-month windows placed before/after the update," indicating an improved capacity for market participants to adjust prices quickly.

Increased regulatory requirements and demonstrable market integrity

In many regions, crypto exchanges are not yet regulated; however, crypto continues to be a focal point for global regulators, and the requirements are continuously changing. For example, the U.S. Securities and Exchange Commission is closely examining crypto asset markets as it seeks to protect retail investors and fight financial crime. In mid-May, SEC Chair Gary Gensler said that he would like to see more regulation around crypto exchanges, and further stated during the Financial Industry Regulatory Authority's annual conference that the investing public would benefit from more investor protection on the crypto exchanges. In June, the then-Financial Conduct Authority Chair, Charles Randell, stated that U.K. consumers need to be protected from potentially nefarious crypto investments. "The tide of regulation is turning all over the world, and online platforms should expect a future where regulation addresses the significant risks they pose in the same way as other businesses," said Randell. "Same risk, same regulation."

Fairness, transparency and market integrity are the cornerstones of inspiring confidence in markets. As global regulators strengthen supervision in this area, crypto exchanges can implement decades of learnings from traditional markets and take proactive steps to mitigate manipulation in the market by leveraging technology to protect retail investors and encourage institutional participation. With demonstrable controls and technology in place, crypto markets can help provide safer trading venues for those involved while laying the groundwork for a smoother journey to institutionalization.