Crypto firms to buy traditional financial institutions?
Crypto-focused companies should use their high valuations to buy traditional financial firms (TradFi) and more traditional securities should move to a blockchain according to the Greenwich Coalition.
The consulting firm said in a report, Main trends in market structure for 2022, that unconventional mergers and acquisitions in financial services are likely this year.
– Coalition Greenwich (a division of CRISIL) (@CoalitionGrnwch) January 4, 2022
David Easthope, senior analyst who leads fintech research on market structure and the technology team at Coalition Greenwich, told a webinar that there is a huge amount of consolidation going on among banks, managers of ‘assets looking for scale and efficiency, exchanges buying trading venues to offer multiple trading and asset class support, and fintechs looking to scale.
Easthope said, “We expect more announcements and unconventional linkages, in addition to traditional financial institutions buying their way into digital assets.”
In October 2021, Cboe Global Markets announced the acquisition of Eris Digital Holdings. ErisX operates a US-based digital asset spot market, regulated futures exchange, and regulated clearinghouse. Cboe said the property presents a unique opportunity for the exchange group to enter the digital asset and derivatives spot markets.
In the same month, FTX, a U.S.-regulated cryptocurrency exchange finalized the purchase of LedgerX, which was renamed FTX US Derivatives. Through the deal, FTX US secured a designated CFTC regulated contract market, a swap execution facility and a derivatives clearing organization.
Easthope expects M&A operations to move beyond licensing to more strategic partnerships and unconventional pairings.
“I think 2022 is going to force us to stop thinking only about the big exchange or the broker who will buy Coinbase,” he added. “We should think about what Coinbase or FTX will continue to buy and what traditional businesses might they be looking at as we go along.”
He also pointed out CME Group announces in 2020 a 10-year strategic partnership with Google Cloud. CME will migrate its technology infrastructure to Google Cloud before finally moving all of its markets to the cloud. Google has also invested $ 1 billion in the exchange group.
“It’s really remarkable that Google took a stake in CME,” Easthope said. “Over the years, we’ve talked a lot about the entry of big tech into capital markets, and maybe that time has arrived. “
Tokenization of everything
Easthope also predicted that a larger set of traditional financial assets would be transferred to distributed or “on-chain” ledger technology.
“We have seen some assets go up in chain, like venture capital and art, and we have seen symbolic securities,” he added. “We expect to see a lot more of the existing assets on the chain, such as token investment funds or bonds moving into Ethereum. It’s really the tokenization of everything.
He explained that 2021 was a year when traditional financial institutions became more ubiquitous in digital assets as market structure, trading desks and even technology became more user-friendly. Once assets are on chain, he stressed that markets would be more transparent in terms of registration of ownership and free transfers.
– Coalition Greenwich (a division of CRISIL) (@CoalitionGrnwch) December 17, 2021
“Tokenization can open up these assets to a much larger investor base, whether they are in the United States or elsewhere,” added Easthope. “Once you have these assets on the chain, the legacy post-trade processes can be resolved. “
If the regulation is more effective, there will be a reduction in risk and operating costs. However, he warned that future activity will depend on regulators, either granting tokenization or mostly staying on the sidelines – and neither of these scenarios are guaranteed.
Retail investors benefit from the treatment of institutional investors
Kevin McPartland, head of research in the Greenwich Coalition’s Technology and Market Structure group, told the webinar that he has never seen individual investors participate in the conversation in capital markets like they have been doing it for the past two years.
“It has been quite amazing to watch in all the markets – stocks, options and fixed income securities, ”he added. “It’s really everywhere.
When he started working in the Wall Street environment, institutional investors had technology that was way ahead of retail platforms.
“Now the retail investor has incredible access, whether it’s sophisticated order types or even execution algorithms built into some active traders’ retail platforms,” McPartland said.
In addition, the retail industry has access to AI-powered investment selection and portfolio construction, including direct indexing, both in equities and in fixed income.
The report pointed out that the United States Securities and Exchange Commission closely monitors retail disclosure requirements and considers what is “right” for the average investor.
“This review could slow innovation in retail investment in the interests of security,” the report said. “Nonetheless, whether because of or despite the gradual improvements in the structure of the retail market, the retail investor has never done better.”
Other trends highlighted in the report include an active SEC, a dramatic increase in market transparency, changes in pricing and the competitive landscape of market data, standardization of APIs and other technologies, growing competition. for incumbents of emerging startups and a potential resurgence for major brokers.