Counterparty Insights #4
Perspectives on Institutional Adoption & Custody Infrastructure
Attractive return opportunities and efficiency gains are driving institutional adoption of digital assets, but what does “institutional adoption” actually mean? In this newsletter, we compile insights from industry participants and provide our own color. This week’s commentary centers around institutions exploring DeFi and stablecoin yields, evolving banking relationships, and European custody-related regulations.
Spotlights
Cordial Systems
Cordial Systems offers self-custodial infrastructure for digital assets, giving institutions the flexibility to run all of custody processes locally while maintaining full control over governance and security.
Industry Take: Diverging Standards, Traditional vs Crypto-Native Markets
“In the EU, there’s a big drive for self-hosted wallet infrastructure to meet various risk and compliance needs both in the MiCA world and also MiFID for on-chain capital markets.
For our on-chain capital markets customers, such as those focused on RWAs and tokenization, there’s a growing emphasis on the details of post-trade capabilities. This includes attention to time stamping, data feeds and sources, as well as reporting.
This highlights a bifurcation between the needs and expectations of traditional capital markets moving on-chain, and that of pure cryptocurrency financial market infrastructure as we’ve known it to be in the last few years. The pure crypto segment tends to focus on delivery vs payment (DvP) settlement at face value, using a transaction hash of physical delivery as validation, with less emphasis on the post-trade lifecycle details required to ensure execution and settlement happen correctly. The definition of ‘correct’ varies depending on the regulatory regime or the handbook of a trading venue.”
— Sebastian Higgs, COO & Co-Founder
BlockFills
BlockFills is a digital asset trading and financial technology firm offering OTC trading, market access, and liquidity solutions. Their platform supports automated execution, real-time risk management, and multi-asset trading capabilities for institutional clients.
Industry Take: TradFi Hedge Funds in Search of Yield
"A key trend over the last 12 months has been a real interest from TradFi hedge funds entering the crypto ecosystem, with a focus on gaining exposure to DeFi, in an efficient and safe manner. The latest PwC report says 29% of traditional hedge funds are now investing in crypto, up from 21% the year before. Crypto-native hedge funds returned 35% on average in 2023, compared to 11% for traditional hedge funds. Its a search for yield, edge, and expanding the breadth of assets these hedge funds want to trade.
Everyone and their mother has a stablecoin now. On Crypto Morning, I’m reporting on a new stablecoin a day. Stablecoins are great for facilitating day to day activities. However, they haven’t earned yield in the past. As the ecosystem develops, you’re seeing institutions like Franklin Templeton and BlackRock having tokenized money market funds that offer daily yield opportunities, like a checking account for crypto so to speak. Trading firms are looking at how to incorporate stablecoins that earn yield and post as collateral and margin. Really the battle is waiting for adoption, trading firms want stablecoins that their counterparties also accept.”
— Katy Allen, SVP of Institutional Sales & Business Development
Aleno
Aleno is an on-chain market data provider offering real-time data and custom-built solutions for DeFi asset managers, oracles, and institutional teams. Their bespoke development services are tailored to support complex DeFi and cross-chain needs.
Industry Take: Banks Embrace DeFi, Ethereum Remains the Benchmark
“We observe that the ecosystem is increasingly shifting towards banks across our various clients:
Banks are building closer relationships with DeFi Asset Managers to better understand the intrinsic mechanisms of DeFi.
Oracles are deeply adapting their products to meet banks’ expectations, and some banks are already pushing their data feeds into Oracle networks.
On the blockchain side, the ecosystem is moving toward increasingly faster solutions, such as megaETH and Fogo, which are expected to launch soon. Meanwhile, the majority of TVL still remains on Ethereum, due to the lack of solutions that fully meet professional requirements.”
— Antoine Vales, CEO
DigOpp’s Take
Here are some thoughts from our team on the insights shared above.
Institutional DeFi Interest
It makes a lot of sense that institutions are becoming more interested in DeFi yields, especially those delivered by stablecoins. DeFi yields often deliver more attractive returns than their traditional counterparts. However, we see institutions facing a major hurdle: extracting these yields isn’t a straightforward risk-underwriting exercise, especially because the operational infrastructure is completely foreign to traditional finance operations. For example, a DeFi RWA platform was the victim of an $8.4M loss due to custody failures. This highlights the importance of understanding the underlying risks of the DeFi infrastructure.
EU Pressure on Custodians
The observations on European regulatory pressure on self-hosted custody infrastructure do sound fairly similar to the SEC’s SPBD (Special Purpose Broker Dealer) guidelines in the U.S., which mandate firms to maintain full control of all technical aspects. Whether mandating full on-prem custody infrastructure is a good thing should be debated, but we’ll save that for later. It is interesting to consider the implications this will have on the development of the crypto custody industry. Many custodians are already offering pseudo-white-labeled solutions to support on-prem deployment, and we expect this trend to certainly pick up if regulators continue in this direction.
That’s it for this week - stay tuned for more insights in next week’s issue.
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