Acuiti reveals its study on institutions’ adoption of digital assets’ trading.

Acuiti Management Intelligence, in association with Bitstamp and the CME Group (NASDAQ: CME), conducted a study on institutional adoption of digital assets’ trading. The key question: What’s holding back institutions? (acuity.io)

Acuiti surveyed various market groups. One, senior executives from the buy-side, sell-side, and proprietary trading groups specialized in traditional derivatives trading, clearing and execution. Trading firms with a core focus on digital asset trading formed another group, while institutions providing clearing or execution services made up the third.

Acuiti: Why institutions are still cautious

Trading organizations, whether traditional institutions or crypto trading firms, were asked to choose from the following range of risks. Which of these inhibited their desire to enter, or increase digital asset trading?

1. Security of exchange/Fears over hacking.
2. Counterparty risk with exchange
3. Concerns over custody,
4. Concerns over AML & KYC of exchanges,
5. Fear of reputational damage,
6. High margin requirements/pre-margining requirements,
7. No transparent price formation,
8. Counterparty risk with exchange and
9. High volatility in digital assets

The survey found that the first five concerns were top-of-mind for all trading institutions, as shown in this graph:

However, traditional institutions were particularly worried about the three risks of Security of exchange/Fears over hacking, Custody, and High margin requirements/pre-margining requirements.

Trading preferences

“We identified two major splits in the current market for crypto trading. One was between traditional trading firms and specialist crypto trading firms. Traditional firms that traded digital assets tended to limit their coverage to bitcoin derivatives on traditional markets, such as CME, while specialist crypto firms traded on a broad range of markets,” said Will Mitting, managing director of Acuiti.

Interestingly, the survey found that firms trading on multiple digital exchanges were more profitable than those trading just one or two.

Most popular cryptos for trading institutions:

The most preferred currency pairs were BTC/USD, ETH/USD, ETH/BTC, BTC/USDT, and XRP/USD, in that order.

Sell-side reservations

“We also found a growing split between demand from traditional trading firms to broaden their coverage of digital assets and the willingness or ability of sell-side firms to provide access,” added Mitting.

Why were service providers hesitant to expand their offerings?

Top reasons included:

• High volatility in digital assets
• Lack of internal expertise
• Limited client demand (brokers)
• Concerns over AML & KYC of exchanges (banks and non-bank FCMs)
• Fear of reputational damage (banks and non-bank FCMs)

What does it all add up to, and what does the digital future hold for institutions?

The survey found that only a fifth of traditional firms were currently trading digital assets such as bitcoin and ether. However, encouragingly, there is evidence of growing interest firms to either enter the digital assets trading market or to expand their trading to more cryptos.

Even for those firms that were currently not trading digital assets for various reasons, an overwhelming 97% indicated they might explore an opportunity to re-enter the market within the next two years. On the other hand, about 45% of respondents planned to scout these opportunities within the next six months or less.

These findings, therefore, indicate that digital assets are soon likely to enjoy significant growth from traditional trading firms and institutions.

“To enable wider spread adoption, clearing firms and other service providers will have a expand their offerings to include a range of markets,” said Acuiti.

Regulatory hurdles however remain.

“Ongoing initiatives in the US, EU, and the UK are putting in place a more formal regulatory structure for specialist venues, which should lead to significant growth,” the report said. “CME and the traditional derivatives markets will sit alongside regulated digital assets exchanges creating a vibrant and dynamic market for trading.”

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