In recent years we have seen the rapid evolution of cryptocurrency markets from OTC trading to activity across more than 500 exchanges, resulting in infrastructure fragmentation due to the use of multiple distributed ledger technology platforms with little to no interoperability. This has complicated the settlement and custody process, and increased costs and operational risk as investors and their intermediaries need access to multiple wallets either directly or through a custody provider.
This expansion has also taken place without a holistic regulated framework to fully govern and supervise issuer, investor and service provider responsibilities and behaviours. With cryptocurrency investment set to rise significantly over the next five years, a new paper from Capco Crypto-assets: Unlocking the potential through regulatory reform, explores the regulatory reform required to unlock the potential of the UK and European crypto-asset market.
The past year has seen the emergence of the first shoots of crypto regulation in Europe. The European Commission, via the Markets in Crypto-Assets (MiCA) proposals, is looking to establish a regulated and structured market ecosystem that achieves parity with more traditional financial instruments such as equities, bonds, structured products, credit and rates derivatives.
As reforms continue to take shape, firms and market infrastructures do not have the luxury of waiting until the last moment to make the necessary changes to be market ready. This is a brand-new market requiring new infrastructure, and firms accordingly need to track the progress of the regulation closely and monitor levels of market readiness between now and 2024 (and beyond, as the market scales).
This involves defining, designing, planning and implementing solutions taking into account these critical factors:
- Product and market strategy – market role, service scope, location, product coverage.
- Regulatory approvals – authorization process and timelines, regulator’s readiness.
- Client engagement – client service needs, agreements, technology change, client education.
- Service model – front-to-back service delivery model, market access, service partners.
- Operating model – function and organization, location, internal vs. outsourced.
- Staff competency – awareness and training, upgrading skills and competencies.
- Technology – DLT, market and client connectivity, compliance, risk and finance changes.
Mark Profeti, Principal Consultant at Capco and co-author of the paper, says:
“We believe that not everyone will wait for the regulation to come into effect before moving into the crypto-asset or wider digital asset space. Opportunities exist today to participate in other forms of digital and tokenized asset classes, and some of the larger custodian banks have recently announced their intentions to launch digital asset custody services across a broad range of asset types.
“It is therefore important for firms to ensure that, whatever their entry point into the world of digital assets, they have the right infrastructure and DLT solutions in place to support the full range of asset types, including cryptocurrencies, e-money tokens, tokenized securities, commercial paper, structured products, investment funds and non-bankable assets, as client demand grows and markets evolve.”
Capco is a global management and technology consultancy specializing in driving digital transformation across the banking and payments, capital markets, wealth & asset management and insurance sectors.