After a long winter, cryptocurrencies have now been on the rise for four months, and industry participants have been quick to forget that the sector still has many challenges that it is yet to overcome.
The industry still faces difficulties with execution, slippage, settlement delays, custody, and regulatory challenges, to name a few. While adoption is increasing, and new technology and services are entering the space every day, trading cryptocurrency is still more difficult than other assets.
Speaking to Finance Magnates Patrick Franz, Managing Director of PFYN Advisory, an advisory firm, said: “It is certainly a refreshing start in the year 2019 for the crypto industry, but we are still a long way away from solving infrastructure and regulatory challenges.
“Looking at the overall industry, I would go as far as taking parallels to the FX world in the ’80s, and early ’90s with the emerging first platforms price feeds and subsequently the solution of credit limits, central clearing and settlement confirmation via the most common one like RTNS & TCNF.
The future for crypto is bright but full of challenges
PFYN positions itself in the crypto sector similar to where a Prime Broker sits in the Interbank Market. The company has the vision to provide an ecosystem where participants trade at an institutional level, secure to transact, live price streaming 24/7 with significant depth in the market, and bespoke settlement.
When asked what the current state of the cryptocurrency market is, he had this to say: “Currently what we hear from our clients is feedback relating to difficulties of execution, slippage and trading in other cryptocurrency pairs others than USD cause delays in settlements due to the conversion of the FX leg and physical settlement.
“Banking relationships are scarce at best or simply non-existent. If they exist, for lots of exchanges and OTC desks, it is still very challenging to find a local bank in their respective jurisdictions whereby in the US it gets better with every day coming.”
Regulation, regulation, regulation
So what are some of the ways that cryptocurrency can overcome some of these obstacles? One of them, according to Franz, is none other than regulation.
Regulation has been a big topic in the cryptocurrency industry and has been pushed even further into the spotlight following Facebook releasing the whitepaper for its stablecoin Libra.
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In fact, one of the key benefits that Facebook’s Libra project could bring is more clarity concerning the legal aspects surrounding cryptocurrencies, such as whether they can be considered as securities.
However, Franz suggests that despite regulations still being in their infancy in the crypto industry, there are still some promising developments in the space, with many jurisdictions having formed working groups and associations with regulators, banks and other professional service providers.
So what exactly needs to be regulated? According to Franz, the protection of investors should be the primary concern for firms, and more regulation should be in place to accommodate this. At present, many firms in the space claim to be regulated. However, Franz points out that clients need to look closer as to for what the individual entity is actually regulated.
Crypto markets are fragmented and lack depth
Market fragmentation, depth, and liquidity are also key issues in the space. When asked if there is enough depth to the crypto markets, this is what he said:
“If we are comparing this to similar markets like the FX market and the prices a trader can obtain on any common platforms, then definitely not. For institutional investors, the market is opaque and price discovery is restricted.”
“So far, we received feedback on being one of the few offering a transparent pricing platform especially with guaranteed execution and minimal slippage. This is yet non-existent in the market.”
In terms of liquidity, fragmentation of market participants and connectivity are the main issues, as far as Franz is concerned.
“While we have worked towards a solution with banks in Oceania as well as in SEA and Europe, it is still a challenge to accommodate instant settlement for significant transactions,” he elaborated.
“We are, however, working with key partners and have overcome this challenge. It does require the support of strong partners where each one of them needs to play their role. It’s like an orchestra, it needs to be in sync!”