How Structured Products Make Crypto-Assets Bankable for Institutions
Institutional investors face entirely different challenges in crypto markets than retail investors. They need professional trading systems and legally compliant custody solutions. Structured financial products can provide solutions.
Although institutional investors do invest in crypto assets, demand is still relatively small compared to other asset classes. When Hedge Fund-investor Paul Tudor Jones invested “between one and two percent of his portfolio” in Bitcoin, Media outlets announced the next wave of institutional money. It was said to bring Bitcoin’s total market capitalization to over one trillion US-dollars – compared with currently 170 billion US-dollars.
It’s certainly true that many institutional investors are currently interested in crypto assets. A study by Fidelity found that 80 percent of all institutions consider digital assets as attractive investments, and 30 percent have already invested in the asset class. Nevertheless, there are still roadblocks to institutional adoption, as institutional investors have entirely different regulatory and operational requirements compared to retail investors.
Retail investors have easier access
For retail investors, crypto-investments are not that complicated. They register to a digital exchange and directly trade cryptocurrencies in their own wallets. While retail investors have relatively easy access to crypto-assets, most digital exchanges do not offer “packages” that meet the needs of institutional investors. For instance, the spreads on the exchanges are often high, the “market price” fluctuates between different trading venues, and KYC-onboarding does not always accommodate corporate clients.
Order routing and crypto-custody
Institutional investors also execute much larger orders than retail investors, which is why order-routing systems have become the standard in traditional finance. Order routing systems connect the investors’ trading systems via APIs to various exchanges, enabling them to place an order on several trading venues simultaneously without influencing the price through their own trading volume. Specialized service providers offer such systems on crypto-markets as well.
Due to strict regulatory requirements, institutional investors also need licensed crypto-custody services to store assets legally compliant and secure. Ideally, this custody solution is directly linked to the order routing system and the respective exchanges.
The challenge remains that investors must register directly with the exchanges and custody providers. Since exchanges are usually based in different countries and therefore subject to different laws and KYC requirements, this onboarding process can take several months.
To avoid this challenge, investors have two options: They can either work with a broker who trades and holds the assets in custody. If the broker is registered with several digital exchanges via a broker-dealer license, investors don’t need to go through the onboarding process.
The second solution is structured financial products that already meet all regulatory requirements – “bankable” assets that institutions are allowed to invest in. The investor then simply buys a product that replicates, for example, a single crypto-asset, a crypto index, or an actively managed crypto portfolio, leaving trading and custody to the issuer.
Bankable crypto-products are currently the preferred solution for family offices and mid- and large-sized asset managers to gain easy access to blockchain markets. With the IVO-Bond, INVAO has achieved precisely that: Institutional investors can invest in the blockchain asset class by investing in one single financial product without having to worry about regulations, risk management, or technical details. For the foreseeable future, such solutions will remain the best way for institutional investors to access the crypto market.