Jim Radecki is the Global Head of Business Development in Cumberland, a subsidiary of the DRW Company.
The following is an exclusive contribution for the 2018 year of CoinDesk under consideration.
At the start of this year, the total value of all encrypted assets reached a record high of over $ 800 billion, driven by a wave of retail clients seeking to seize opportunities in a new market.
Although the ecosystem aimed to attract this influx of interest, in reality, the necessary infrastructure to support this magnitude of participation was lacking. The industry has reached a critical point, where the systems have undergone stress tests and it has become clear that the existing model has not been perfected or built to scale at such a rapid adoption rate.
The sector has not been prepared and although volumes have declined dramatically, the work of developing the ecosystem has dramatically increased in the last year.
Within the traditional capital markets, there are several systems that work together to enable these markets to operate efficiently. The necessary cryptographic asset infrastructure diverges from the more traditional model, which has created several critical points within the space.
These obstacles have made it difficult for investors – particularly on the institutional side – to enter these markets. While the industry is facing these nuances, there are several key barriers to overcome before being ready for the next wave of market participation.
Barriers to entry
The structure of the assets market is extremely fragmented; there are more than 200 exclusive platforms and platforms, each with its own set of products. Exchanges also operate from different jurisdictions, which offer different rules, requirements and operating standards and guidelines.
Furthermore, there are still questions to be answered regarding qualified custodians. The existing solutions are varied and nascent, each offering different services for different currencies. Today there is no one-stop solution.
The industry also lacks generally accepted standards or good practices in the areas of security checks, operations, research and evaluation. You have to think about managing your operational risk in a completely different way compared to traditional markets: this is the only market in the world where operational risk is greater than financial risk. And while research and methodologies continue to improve, people want access to more standardized metrics, analysis and price discovery to understand how to evaluate these resources.
And perhaps most importantly, concerns about regulatory clarity remain one of the biggest entry barriers.
While regulators have taken important steps to understand these markets and have provided guidance in some cases – bitcoin classified as commodity, not as security – we still need well defined road rules.
Anyone sitting on the sidelines today is probably awaiting clarity from regulators before even considering operating in these markets.
While these drawbacks may seem daunting, the pressure on these systems has prompted the industry to rise and start developing solutions at a much faster rate than when we had not experienced the rush to market activity at the end of last year. . Many works have been done in 2018 to encourage regulatory clarity, simplify operations and continue to build space.
This year has been a major change as talents have left large banks and financial institutions to apply their skills to the development of the cryptographic ecosystem. There was also an increase in job hiring as these hurdles came to light and companies realized they needed the right talent to manage the construction of new infrastructure.
On the regulatory front, we saw the introduction of new industry associations and SROs focused on protecting market participants, providing clear rules and standards and encouraging professionalism in space, including the Blockchain Association, the Association for the management of digital resources (ADAM) and the Virtual Association of raw materials. Collaboration between these parties, organizations like the Digital Chamber of Commerce and government officials should pave the way for key developments in the coming year.
Much of the attention today is focused on price, but there is a strength in the work done this year to create real and concrete progress. If you look at where the industry was two years ago today, before the dramatic rise in price, before the underdeveloped infrastructure problems were identified and before so many eyes looked at the space – we have come a long way, very quickly.
While there is still a lot of work to be done, it remains a strong basis for optimism.
We expect 2019 to look a lot like 2018, with more people working diligently behind the scenes, refining their strategies and preparing for the next wave of growth. At Cumberland, we are committed to helping the ecosystem grow and evolve responsibly and sustainably.
This year we have brought industry closer to that future and we have been proud to be a part of it.
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