Cracking Crypto’s Trust Conundrum: Will Bank-Backed Exchanges Hold the Key?

"Former FTX CEO Sam Bankman-Fried Convicted on All Fraud Charges, Marking the End of an Industry-Wide Investigation"

Former FTX CEO Sam Bankman-Fried has been found guilty on all seven fraud-related charges by a jury of 12, marking the end of a period of intense scrutiny for the cryptocurrency industry. The industry has undergone significant changes following a series of collapses and scandals in 2022, which exposed the need for better risk management, governance, and oversight. Interestingly, the same financial institutions that crypto sought to distance itself from are now making headlines with their involvement in tokenized real-world assets. Franklin Templeton, Deutsche Bank, and HSBC have either launched or expressed interest in blockchain-based financial products, signaling a shift in the industry.

The concept of “institutional-grade” has also evolved in the wake of these developments. Previously, it referred to the quality of products offered, such as spot or margin trading capabilities. However, in the post-FTX climate, it has come to represent something more essential: trust and safety. Trust is particularly crucial for bank-backed exchanges, as it attracts clients who value the brand and the regulatory frameworks associated with financial institutions. In countries like the UK and Singapore, where there are clear regulatory regimes for digital asset trading, being bank-backed provides an additional layer of compliance. Custody has become a significant focus, with institutional investors showing a preference for traditional finance (TradFi) firms to safeguard their digital assets.

Standard Chartered Bank’s Zodia Custody, backed by SBI and Northern Trust, is an example of a bank-backed institution-focused digital asset custodian. Its sister company, Zodia Markets, operates as an independent institutional digital asset trading and brokerage venue. This separation allows for safe and trusted digital asset trading services within a robust regulatory regime. While bank-backed exchanges cater to a limited clientele, they are not offering anything new in terms of products or accessibility. DBS, Southeast Asia’s largest bank, operates a member-based digital asset exchange limited to financial institutions, corporate accredited investors, and professional market makers. Despite its restrictions, DBS has seen increased popularity, with BTC trading volumes up 80% earlier this year.

EDX Markets made headlines in the United States when it launched with the backing of financial heavyweights like Charles Schwab, Citadel Securities, and Fidelity Digital Assets. It aimed to bridge the gap between financial institutions and digital asset natives. However, until bank-backed venues can accept retail players, the market is likely to remain unchanged. These developments are primarily about overcoming regulatory obstacles. While safety and trust are crucial in the crypto industry, relying solely on the reputation of traditional banking is not the only solution. Blockchain technology, with its inherent trustlessness, has the potential to build a financial system that is less reliant on individual morality and management. Exchanges built for crypto-native investors still have an advantage over latecomers, and banks will need to adapt to compete for a share of the market.

In conclusion, the crypto industry is experiencing a shift as financial institutions become more involved in tokenized real-world assets. Trust and safety have become paramount, leading to the rise of bank-backed exchanges that offer compliance and regulatory frameworks. Custody solutions are also evolving, with a preference for trusted custodians among institutional investors. However, the industry should not solely rely on the reputation of traditional banking, as blockchain technology has the potential to create a more trustworthy and transparent financial system. Exchanges built for crypto-native investors still hold an advantage, but banks can compete by adapting to the changing landscape.

Martin Reid

Martin Reid

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