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Urban Clouds

Exploring Institutional Adoption of Digital Assets

The Digital Pound Foundation’s podcast recently featured an episode with Duncan Trenholm, Managing Director of Digital Assets at interdealer broker TP ICAP. Duncan provided an insider perspective on the current landscape and future trajectory for digital assets within wholesale markets.

He discusses why firms like TP ICAP are looking at digital assets, barriers to mass adoption, the challenges and promises of blockchain-based settlement, and the exciting potential of tokenized assets becoming more widespread.

This article recaps the key insights from the episode and what they might mean for the future of digital finance.

Key takeaways :

  • Interdealer brokers like TP ICAP are gaining firsthand experience in crypto markets to acquire expertise in blockchain infrastructure, positioning themselves strategically for the digitization of traditional wholesale assets over the next decade.

  • The mass adoption of digital assets by institutions faces challenges like building secure custody capabilities, achieving interoperability across fragmented DLT/blockchain networks, reaching critical participant mass, and clear regulations, though the trajectory points toward gradual mainstream integration.

  • While blockchain settlement offers efficiencies, challenges remain around cross-chain interoperability, integrating traditional and faster settlement systems, managing stablecoin risks, and developing institutional capabilities to harness precision settlement opportunities.

  • Wholesale central bank digital currencies can act as a trusted bridge for blockchain settlement, minimizing stablecoin risks and enabling seamless cross-network atomic transfers, thereby stabilizing and mainstreaming digital asset markets.

  • Shared settlement infrastructure for interoperable digital asset trading promises efficiency gains, seamless markets across asset classes, innovative business models, and cost/risk reduction if applied to traditional finance, but proper regulation is critical.

Why are interdealer brokers like TP ICAP interested in digital assets?

For TP ICAP, crypto has been a gateway to understanding digital assets. As Duncan explains, firms need a commercial reason to build new capabilities. The rise of crypto provided that trigger. By developing crypto trading infrastructure, TP ICAP has started to build expertise in digital wallets, custody, and blockchain-based markets. From their perspective, this positions them for the longer-term vision of traditional assets like equities and bonds transitioning to blockchain settlement. As Duncan says, it's a 5-10-year journey, with crypto as the “first asset class on this technology.” While public blockchains gain traction, private enterprise DLTs are also emerging. By getting hands-on experience with digital assets starting with crypto, firms like TP ICAP intend to be ready to support the digitization of wholesale markets in the coming decade.

Barriers to mass adoption of digital assets

A few key barriers are slowing mainstream institutional adoption of digital assets. First is the operational challenge of secure digital custody. As Duncan explains, trading firms have had to build new capabilities to hold blockchain-based assets. Conservative institutions like banks undertake lengthy vetting before selecting custodians, delaying their onboarding. Interoperability between different distributed networks is another technical barrier. The lack of critical mass among participants is also key - to reap the benefits of shared ledger settlement, an ecosystem of digitally-enabled firms must emerge. This “drip-drip-flood” effect will take time. Regulatory clarity will also accelerate adoption. But it seems that the direction is clear, even if the journey is gradual.

The challenges of digital asset settlement

Settling digital asset trades on blockchain can unlock efficiency, but also poses challenges. Duncan highlights cross-chain interoperability. If assets sit on different networks, seamless atomic swap settlement is harder. Traditional fiat settlement also can’t run 24/7, so integrating its cadence with faster blockchain settlement creates friction. Stablecoins help bridge this gap, but introduce counterparty risk. However, the potential for “precision settlement” unlocks opportunities to reduce risk and costs compared to delayed net settlement models. New institutional capabilities and mindsets are needed to manage funding and collateral with faster blockchain settlement.

Central Bank Digital Currencies

Central bank digital currencies (CBDCs) for wholesale markets could provide the trusted digital settlement layer to enable mainstream blockchain adoption. Wholesale CBDCs offer regulated central bank money as a settlement asset. This removes the need for intermediary “stablecoins” between fiat and crypto, reducing counterparty risk in digital settlement. With CBDCs, firms can achieve atomic settlement across networks. Duncan believes wholesale CBDC adoption will be “greatly welcomed” by digital market participants, underpinning stability and efficiency.

The potential of common settlement infrastructure

Looking forward, Duncan is most excited by the promise of shared market infrastructure for digital asset settlement. Trading and settlement connected on a common fabric can enable “huge efficiency gains” with automated, near-instant settlement. Duncan envisions an ecosystem where diverse digital asset tokens trade seamlessly, eliminating fragmentation across asset classes. New business models tailored to blockchain settlement will emerge. If these capabilities are extended to traditional finance, costs and risks can be reduced for investors. But work remains to properly regulate these markets and ensure financial stability.

What to remember :

  • The path to mainstream institutional adoption of digital assets in wholesale markets will be gradual, but it seems that the direction is clear.

  • Crypto is already acting as a gateway for firms to build expertise in digital wallets, custody, and blockchain-based settlement.

  • Conservative institutions still need more time to integrate digital capabilities into their legacy systems and processes.

  • Technical challenges around interoperability and bridging traditional and blockchain settlement models persist.

  • Central bank digital currencies can provide the trusted settlement layer to stabilize these fledgling digital markets.

  • The industry needs to collaborate carefully to ensure this transition is robust, secure, and aligned with sound regulations. Education also remains critical as traditional firms upskill for the new digital paradigm.

Watch the full episode :


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