Crypto Firms To Buy Traditional Financial Institutions ?
Crypto-focused firms are expected to use their high valuations to buy traditional financial (TradFi) firms and more traditional securities are expected to move onto a blockchain according to Coalition Greenwich.
The consultancy said in a report, Top Market Structure Trends for 2022, that unconventional mergers and acquisitions in financial service are likely this year.
— Coalition Greenwich (a division of CRISIL) (@CoalitionGrnwch) January 4, 2022
David Easthope, senior analyst who heads fintech research on the market structure and technology team at Coalition Greenwich, said in webinar that there is a tremendous amount of ongoing consolidation amongst banks, asset managers looking for scale and efficiency, exchanges buying trading venues to offer multi-asset class trading and support, and fintechs looking to scale.
Easthope said: “We expect more unconventional announcements and pairings, in addition to traditional financial institutions buying their way into digital assets.”
In October 2021 Cboe Global Markets announced an acquisition of Eris Digital Holdings. ErisX operates a U.S. based digital asset spot market, a regulated futures exchange and a regulated clearing house. Cboe said ownership presents a unique opportunity for the exchange group to enter the digital asset spot and derivatives marketplaces.
In the same month FTX, a US-regulated crypto exchange completed its purchase of LedgerX, which has been rebranded FTX US Derivatives. Through the deal FTX US gained a CFTC-regulated designated contract market, swap execution facility and derivatives clearing organization.
Easthope expects M&A deals to move beyond acquiring licences to more strategic partnerships and unconventional pairings.
“I think 2022 is going to force us to stop thinking only about which big exchange or broker will buy Coinbase,” he added. “We should think about what Coinbase or FTX will continue to buy and which traditional firms might they look at as we move forward.”
He also highlighted CME Group’s announcement in 2020 of a 10-year strategic partnership with Google Cloud. CME will migrate its technology infrastructure to Google Cloud before eventually moving all of its markets to the cloud. Google has also made a $1bn investment in the exchange group.
“It is really notable that that Google made an equity investment in CME,” said Easthope. “We’ve talked a lot over the years about big tech buying their way into capital markets and that time may have arrived.”
Tokenization of everything
Easthope also predicted that a broader set of traditional financial assets will be brought onto a distributed ledger technology or “on chain”.
“We’ve seen some assets come on chain, like venture capital and art, and we’ve seen some tokenized securities,” he added. “We expect to see a lot more existing assets on chain such as tokenized investment funds or bonds settling on ethereum. This is really the tokenization of everything.”
He explained that 2021 was a year where traditional financial institutions become more pervasive in digital assets as the market structure, trading desks and even the technology became more friendly. Once assets are on chain he stressed that markets will be more transparent in terms of recording ownership and free transfers.
— Coalition Greenwich (a division of CRISIL) (@CoalitionGrnwch) December 17, 2021
“Tokenization can open up these assets to a much wider base of investors, whether they are in the US or elsewhere,” Easthope added. “Once you have these assets on chain, legacy post-trade processes can be solved.”
If settlement is more efficient, there will be a reduction in risk and operating costs. However, he warned that future activity will be dependent on regulators either blessing tokenization or mostly staying out of the way – and neither of these scenarios are guaranteed.
Retail investors get institutional investor treatment
Kevin McPartland, head of research in the Coalition Greenwich market structure and technology group, said on the webinar that he has never seen retail investors coming into the capital markets conversation as they have over the last two years.
“It’s been pretty incredible to watch across all markets – equities, options and fixed income,” he added. “It’s really everywhere.”
When he started working in the Wall Street environment, institutional investors had technology that was leaps and bounds ahead of retail platforms.
“Now the retail investor has incredible access – whether it be sophisticated order types, or even execution algorithms built into some active trader retail platforms,” said McPartland.
In addition, retail has access to artificial intelligence-driven investment selection and portfolio construction, including direct indexing, in both equities and fixed income.
The report highlighted that the US Securities and Exchange Commission is closely monitoring retail disclosure requirements and thinking about what is “suitable” for the average investor.
“This examination could slow down retail investing innovation in the interest of safety,” said the report. “Nevertheless, whether because of or in spite of incremental improvements in retail market structure, the retail investor has never had it better.”
Other trends highlighted in the report include an active SEC, a radical increase in market transparency, changes in the price and competitive landscape for market data, standardization in APIs and other technology, mounting competition for industry incumbents from emerging startups, and a potential resurgence for prime brokers.
Real-time settlement is the key benefit of blockchain-based processes.
The shared private ledger from Baton Systems enhances settlement speed and efficiency.
Customers can have accelerated treatment of financial transactions, exchange and storage of data.
Project Jura explored cross-border settlement of tokenised assets on a DLT platform.
Committee is holding a hearing on Understanding the Challenges and Benefits of Financial Innovation in the US.