Rewiring of Financial Markets: The Crossroads of Emerging Technology to Solve Yesterday’s Challenges

-Market structure is evolving but credit remains mis-priced and the lack of segregation of functions on exchanges are issues

-Prime brokerage opened the door for FX markets to grow exponentially, crypto will follow the same playbook

-“If Bitcoin does become a hard, preserved value of money like gold, it absolutely makes sense that central banks will hold it.

Prime brokerage opened up the door to huge growth in foreign exchange with daily volumes surging to $6.6tn by 2022 from just above $1tn at the turn of the millennium in a playbook that crypto markets are also likely to follow.

This is according to Michael Higgins, acting International CEO and Global Head of Corporate Development at Hidden Road, who said digital assets as an industry is at an inflexion point as institutional investors grow their presence in the space, leading to changes to practices.

“Many of the crypto exchanges have been resistant and frankly unwilling to provide financial statements and balance sheets, let alone audited balance sheets. That’s a major problem, as institutions have fiduciary responsibility to complete KYC to face any counterparty,” he said.

Higgins highlighted the mispricing of credit and the lack of segregation of functions as key problem areas for the industry. In traditional asset classes exchanges are restricted to running a marketplace, with other business areas such as custody and brokerage strictly separated. “The notion that the exchange is running a marketplace, acting as custodian of user assets, and, in certain instances, running internal market makers is risky and ripe for failure,” he said.

Higgins reflected on the big events in 2024, including BlackRock’s tokenized money market fund, stablecoins’ domination of the market with a $200 billion market cap, led by Tether and Circle, and the launch of the US Bitcoin (BTC) ETF, which he called the “crown jewel”.

“The US market is a very equity-centric market, so taking Bitcoin, putting it to a regulated, acceptable equity format, was the last and final step to truly open up the market,” he explained. “As a result, there’s been greater liquidity [and] greater product development as bigger entrants demand greater accountability and greater accessibility from the entire industry.”

Just as the BTC ETF allowed the US market to gain traction and help overall maturity, Higgins believes that the talk of central banks holding digital assets in reserve could prove to be a reality. “If Bitcoin does become a hard, preserved value of money like gold, it absolutely makes sense that central banks will hold it. Gold is expensive to buy, transfer and hold. Bitcoin is a much better store value.”