The New York Stock Exchange (NYSE) is the largest exchange in the world, and its listed companies have a combined market capitalization of $24.2 trillion. NYSE’s daily trading volume can reach $200 billion, which can be more than the market cap of all cryptocurrencies.
So why are traditional exchanges making inroads into new monies that are powered by blockchain? It’s part of their mission.
The purpose of an exchange is to provide a high-quality, regulated venue for the exchange of financial instruments such as stocks, bonds and other assets (like cryptos). A major exchange comprises a big part of the marketplace, and they wouldn’t serve their tech-savvy customers well by leaving out a $200 billion market.
Moreover, an Oct. 2018 Accenture study finds that fintech ventures are increasingly capturing banks’ revenues. Exchanges can reduce their long-term enterprise risk by being relevant to the digital crowd, and therefore by expanding into new asset classes their current and future clients may want.
Getting in on the crypto act
Intercontinental Exchange (ICE), the parent company of NYSE, describes its business as “[connecting] the largest community of participants in all major markets at key phases of the investing, trading, hedging and capital raising lifecycle.”
That means it connects investors (speculators) with other investors, whether retail or institutional. While market participants bear the risk of buy and sell activities, exchanges make money by charging trading fees, similar to a casino charging rake to patrons. Bakkt says its fees will be $0.50 combined Exchange and Clearing fee, per side, for a one Bitcoin size contract.
Next month, ICE’s new company, Bakkt, will launch a daily futures contract of Bitcoin (BTC) that will allow the No. 1 crypto to be exchanged on a trading platform. It’ll be regulated by U.S. Commodity Futures Trading Commission (CFCT). Bakkt (a wordplay on “backed”) should bring institutional interest to Bitcoin and other mainstream cryptos — whether major or mild interest remains to be seen.
But corporate powerhouses with serious cash are financially supporting Bakkt, including Starbucks, Microsoft and Boston Consulting Group. We can infer that the CEOs and boards of these global companies anticipate potentially making serious money by letting institutions trade cryptos.
Big organizations (such as NYSE) tend to be trusted by big-time capital, and they’re perceived as hack-proof entities that have financial controls in place to detect and prevent fraud. They have top-notch lawyers and accountants who know how to navigate through complex regulations, and to bridle the Wild West of cryptographic coins into a compliant, fenced-in box.
What will greater institutional faith mean to crypto?
In December 2017, CME Group (the world’s largest futures marketplace) launched Bitcoin futures contract that allows big investors and institutional capital to bet on near-future price of BTC. If hedge funds, family offices, endowments, pensions, retirement funds, corporate treasuries, and other institutions pour hundreds of billions into digital coins, then Bitcoin, Ethereum (ETH), Ripple (XRP), Litecoin (LTC) and others could see valuations match or even exceed their peaks as we saw in January 2018.
Wall Street guru Mike Novogratz expects big-time capital to possibly enter the crypto space sometime in Q1 or Q2 next year, but he says custodianship solutions will be required for that to happen. Traditional exchanges and investment firms (like Fidelity) can make that a reality because of their expertise in handling large transactions and in securing their clients’ assets.
They’ve also got existing relationships and existing major accounts (both retail and institutional) that they can leverage to increase trading activity and associated fees.
Traditional exchanges, like banks, are overseen by central authorities — outside parties whom Satoshi Nakamoto sought to render obsolescent by solving the problems of trustless money. Therein lies the friction of ICE, CME, Fidelity and others joining the world of crypto: These are compliant entities that answer to centralized bureaucrats (and shareholders).
They now propose to let other institutions buy and sell decentralized, peer-to-peer and anonymous currencies. As if the 2008 Financial Crisis — under their watch — never happened.
The author holds BTC which is mentioned in this article.