IlanSterk talk Institutional Trading
In terms of being adopted by financial institutions worldwide, the cryptocurrency industry has significant hurdles to overcome before that can become a reality. However, with that said, financial institutions have begun investing in the crypto markets in higher folds than ever before. This is positive and negative, with most crypto exchanges not having the regulation infrastructure to fall back on. Regulators have yet to determine which crypto activities are legal or illegal within commercial law. The result is that the industry is continually growing and maturing with time, but institutional traders are still reserved to invest sufficiently. When the lack of legal uncertainty and liquidity is resolved, full investments will become regular.
Recently an interview was held with the Vice President of Trading with the Hexa Group IlanSterk, who is also the Vice President of Business Development for Alef Bit Technologies. Ilan specializes in Global Assets, FX Trading, and Digital Assets & Derivatives. He’s acquired advanced expertise in terms of technical analysis, investing, regulation compliance and risk management. The interview highlighted the progress and concerns about the cryptocurrency industry, with additional talks on what traders can do before entering the crypto markets. Sterk will be speaking again in July at the Barcelona Trading Conference about the building blocks of cryptocurrency.
The following recap of IlanSterk’s interview displays his thoughts and interests in the cryptocurrency/blockchain industries from an institutional viewpoint. Sterk, during the interview mentions multiple times that financial institutions are already present in the industry, which is evident with firms like JP Morgan entering the market space.
Sterk began his interview when he was asked on the future of institutional investors in crypto. He stated: “If we start with the HSBC bank, they did the first letter of credit transaction a few months ago using blockchain. For a long time, there has been speculation about when institutional investors will start to invest in crypto, and I think that one of the most significant moments has been the announcement by Fidelity, which manages over $7 trillion in assets. They set up a subsidiary called Fidelity Digital Assets, which will provide custodial services in digital assets for institutional investors, trading services in many markets, consulting services and strategies in crypto.”
Ilan continued his remarks by saying, “There is no doubt that the entry of a significant institution such as Fidelity to the crypto markets constitutes an important milestone for investment in the field. We see enterprises in the US starting to accept Bitcoin as payment with apps like BitPay, including companies like AT&T, Nordstrom, Whole Foods, and Starbucks. So adoption is starting to gain traction in that respect.”
MrSterk ended his comments on institutional investors by finalizing his statement with: “I certainly believe that the recent announcement by Facebook about the Libra blockchain that will run the Libra Coin. The Libra Association, with founding members like MasterCard, Visa, eBay, and Uber–and also the Calibra, which is the digital wallets that will store the Libra cryptocurrency and will enable Libra payment transactions–is a turning point that can lead to the mass adoption of digital currencies in the future.”
Bitcoins Exposure Hitting New Records
Reporters then asked IlanSterk if he believes the growth and exposure of Bitcoin will continue. He quickly answered with: “When discussing the institutional exposure to Bitcoin, we can see from [institutional interest] in CME’s Bitcoin futures, that it hits new records of 80 per cent–year-over-year. According to one of the world’s largest Bitcoin derivatives marketplace, the number of open BTC contracts reached a record value of $250 million last week. This equates to around 26,000 Bitcoins.”
Regulation for Crypto Unclear
The Vice President of Trading at the Hexa Group was then asked on his thoughts of regulation for crypto. Sterk commented by saying, “I think that institutional investors all over the world have avoided crypto assets because of multiple issues, the first being custodianship. As I mentioned before, Fidelity has begun to offer custodial services, and also Coinbase has to launch custodial issues. So, hopefully, the custodial issue has been solved. The second issue that causes institutions to avoid crypto is a lack of regulation and a lack of trust.”
Ilan’s statement on regulation continued with: “When we talk about institutional investors–to gain trust in the system, regulation must be put in place. I can say that at Orbs Group, we took up the responsibility and the mission to beef up the ecosystem, including working closely with government officers to build up proper and advanced regulation.”
Sterk then shifted his comments to his home countries regulation. Sterk explained the situation of Israel’s regulation by stating: “Most of the banks in Israel don’t accept any fiat that originated from crypto. Although a new amendment to AML laws mentions crypto, certain issues remain vague, and the bank’s future moves based on this remain unknown. Also, Israel’s securities authority warned of substantial risk in the crypto markets several months ago. So, after the warning, how could institutional investors invest in crypto?”
Ilan finished his statement with the bottom line by saying, “The regulation in most of the world is unclear, and this is another complication for institutional investors. In my opinion, clearer regulation would lead to more participants in the digital asset market.”
Sophisticated Trading Platforms Required
IlanSterk, half-way through the interview, was asked if he believes crypto exchanges need to be upgraded. Sterk stated: “We must have sophisticated trading platforms. At Alef Bit, for example, we provide sub-accounts to each trader using our funds. Currently, only a few crypto exchanges offer such functionality versus trading systems in the traditional markets, who offer this as a standard part of their interface. So when discussing institutional adoption, this is one example of how technology can speed up market adoption. We must have sophisticated trading platforms.”
Sterk went on with his comments to iterate that these platforms can’t just offer sub-accounts, but must also use advanced algorithms. The official comment reads: “In the traditional markets, you have many types of algorithmic trading–VW, or volume-weighted average trading, and TW, the time-weighted average percentage of the volume. These kinds of things you don’t find in most cryptocurrency exchanges.”
Ilan finished his comments on what he believes a sophisticated trading platform should be by saying, “If we are talking about a large amount of an asset that you need to buy, in a traditional market you can place an order via an algorithm to buy a $100 million share of Microsoft,”
This algorithm would allow investors to purchase stocks in a day. However, this feature is currently not available at crypto exchanges. This limits intuitional adoption and shows a lack of infrastructure for these exchanges. It’s why most institutional investors hone in on OTC Desks for crypto trades.
OTC Desks are the Solution
After being asked is crypto exchanges need to be upgraded, he was asked what the ultimate solution would be for cryptocurrency exchanges. IlanSterk commented by saying:
”OTC desks will continue to be the solution. OTC desks provide institutional investors with liquidity solutions. OTC desks can offer liquidity for significant transactions with large amounts, while exchanges cannot provide this. Institutions that need to buy or sell large quantities of digital assets will need to do this through one of the OTC brokers since large amounts can impact the price on an exchange. So, at the moment, OTC is the preferred solution.”
Sterk continued his statement to reporters, saying: “One thing to note is the spread on which the OTC will charge you, so institutional need to compare the price between the OTC broker and, for example, GDAX, Coinbase, or the Trade Block, which is an aggregate of prices from different exchanges. Since there are no fees for OTC trades, OTC brokers are charging spreads, not fees.”
The statement didn’t stop there, he continued with: “So, in my opinion, the OTC desks will continue to be the solution and will be the dominant player on the institutional side in short to medium term–as the industry is not so developed yet, the spreads that brokers charge are narrow. Today, the unregulated exchanges have much more liquidity than the regulated ones, but I assume that this will change in the future as that traders and institutional investors will feel more comfortable to trade in regulated exchanges.”
The End of the Interview
The interview, coming to a close, had reporters juggling to ask their final questions. Sterk was asked what he thinks will happen with crypto liquidity due to the upcoming changes. Ilan stated: “Regulated exchanges have higher liquidity than unregulated exchanges. In the early days, cryptocurrency hasn’t been a mature market. Many exchanges, for example, in Asia, don’t require full KYC from the traders. You can open an account with only an email address.”
His final comments in the interview ended with: “BitMEX, for example, is one of the largest exchanges. It’s not regulated; you open an account with an email–that’s all. Then you deposit your Bitcoin, and you can trade. I think that institutional and retail investors will feel more comfortable to trade on a regulated exchange because someone is auditing the exchange–the capital behind the exchange. When it’s unregulated, there is no auditing; you can’t be sure that everything is correct there.”