Survey Finds “First Evidence” of Mainstream Adoption of Digital Assets

A new survey undertaken and published by the Alternative Investment Management Association (AIMA) in partnership with PwC and Finery Markets, finds what the firms term the “first evidence of mainstream adoption” of digital assets.

The Crypto Trading Report 2022 recorded the market behaviour of 77 institutional market participants and sheds light on the global landscape of trading execution venues for digital assets. AIMA says it aims to provide insights into the current trading rationales of institutional market participants in this space and highlights where institutions trade digital assets. It also explores the factors underlying their choices, including the advantages and drawbacks of each of the various digital asset trading venues and execution alternatives.

Noting that opinions over the value of digital assets are “polarised”, the report studies the centralised exchange (CEX), OTC and de-centralised exchange (DEX) venue types and studies the benefits and drawbacks of each. It finds that 90% of participants in the survey trade on CEXs, while around half trade on an OTC basis. The survey cites the “most interesting fact” as being over a third of respondents trading on DEXs, which it finds surprising because of the regulatory uncertainty involved on trading on such venues. “That being said, of that third, two thirds are regulated/licensed, which shows that there are ways to be both compliant and trade on DEXs,” the report states. “A possible reason for this could be the number of digital assets offered. This would also tally with the fact that supported assets are the second most important factor when choosing an exchange.”

Binance comes out on top of the CEXs with 51% of participants executing there, Kraken (44%), Coinbase (32%), FTX (28%),Bitstamp (18%), Gemini (13%) and LMAX Digital (12%) complete the top seven venues.

On the OTC side, B2C2 is the most popular counterparty with an 18% rating, followed by Cumberland (DRW) and Genesis Trading at 11%, Galaxy Digital at 10%, Blockfills at 8%, DV Chain at 7% and Jump Trading at 6%.

Uniswap, which is subject to a class action lawsuit over how it runs its platform, is the top DEX at 23%, followed by SushiSwap (15%), 1inch (11%), Curve (8%), Balancer (5%), and Pancakeswap and Raydium at 2% each.

The report offers a series of factors that can influence the choice of execution venue, the first of which is the assets supported and the acceptance of fiat currency, which can limit an institution’s trading strategy. The second factor is the reputation of the regulatory landscape the exchange is based in, with the report noting, somewhat obviously, that “this can be important”, as investors may choose to avoid jurisdictions that plan to clamp down on the crypto landscape.

A pickup in trade could see a shift to a situation where more investors trade above $10 million in crypto assets per month. The fact that a similar number of investors started trading in 2021 as in the previous three years in total indicates a relative increase in the number of investors.

Likewise, it adds, this factor might favour jurisdictions where crypto is openly promoted and regulation is less restrictive. Finally, transaction costs and the execution quality of a transaction are identified as factors affecting the choice of exchange venue. Here the report notes, again somewhat obviously, that lower transaction fees and higher execution quality may attract institutional market participants.

On venues, the report finds that CEXs are a popular platform for purchasing crypto with fiat currency, while OTC execution venues were found to facilitate the negotiation of prices in a bilateral setting and DEXs allow investors to purchase a great variety of cryptocurrencies. CEXs excel in terms of user-friendliness and the fact that they are mostly used by retail investors and receive a greater amount of media attention, the report continues. OTC execution venues excel in terms of investor support and the fact that large volume trades can be executed. Furthermore, both parties agree on a price, which has benefits in terms of the predictability of the purchase price and eliminates slippage, it adds. Finally, DEXs allow institutions to exchange a vast variety of crypto- currency not tradeable on CEXs.

The report also identified two mechanisms that enhance the utility of the analysed execution venues by combining certain features to overcome their drawbacks. Smart order routing was identified as an intelligent method for ensuring execution quality across various exchanges using an algorithm. Other execution venues were identified as able to overcome the delay in waiting time and improve the execution quality of OTC markets.

Finally, the survey data on the investing behaviour of institutional actors are analysed and trends established that could merit closer attention in the future, the report says. The first trend discovered was that common law jurisdictions and Switzerland seem to lead in terms of actors being licensed and active in the crypto landscape. This could be because the regulatory requirements in common law jurisdictions allow institutions a greater degree of freedom, it observes.

Several indicators hint at an increase in the adoption of cryptocurrencies, the report finds, noting that, as an example, the study has shown that brokers, hedge funds and OTC desks do not exclusively trade in traditional financial instruments, but are also trading in digital assets. Secondly, the survey saw that the monthly volumes traded cover a wide spectrum, with most investments falling into category of below $10 million. A pickup in trade could see a shift to a situation where more investors trade above $10 million in crypto assets, it states, adding that the fact that among the respondents a similar number of investors started trading in 2021 as in the previous three years in total indicates a relative increase in the number of investors.

Another interesting trend, according to the report was that execution quality, supported assets and regulation were among the top three factors influencing institutional market participants in their choice of execution venue. The fee model came in only fourth on their list of priorities. “The data suggests that while the fee model of execution venues could be relevant, it is not the most crucial at this stage of the market,” the report states. “It is likely that when the standards of the top three choices are harmonised, the fee models will play a more important role, similar to the fee models of present-day bank accounts.”