Institutions are unbothered by crypto assets continuing to trade far below all-time highs, LMAX Group CEO David Mercer told TechCrunch.
Even though the total crypto market capitalization has fallen from over $2 trillion at the beginning of the year to about $1 trillion today, institutional investors “haven’t wavered one inch,” Mercer said.
“It hasn’t gone backward,” Mercer said. After the chaos surrounding crypto lending platforms like Celsius and BlockFi and the collapse of the Terra LUNA ecosystem in May, everyone expected institutions to retract their engagement, Mercer said.
But institutional engagement today is the same as last year, and “may even be better,” Mercer commented. Institutions are moving ahead, he added. “The herd is inching forward.”
In 2018, the company launched LMAX Digital, an institutional cryptocurrency exchange. “[When we launched] we asked 35 banks if they wanted to trade this product and have market data, they said no,” Mercer said. “Today, 14 of those 35 take our market data.”
Although it’s not clear what these banks are using the market data for, Mercer said he sees it as an indication that they’re making plans to enter this space. Traditional banks haven’t truly entered the crypto space and it’s unlikely that it’ll happen this year due to concerns like regulation, he added. But in three to five years, he hopes that’ll change.
What could shorten that time frame? Perhaps more regulatory certainty.
Regulation is a “good thing” but is one of the “well-worn” conversations that is slowing adoption from banks, Mercer said. “We’re going to try and move those hurdles as soon as possible,” he added. “All capital markets have strong regulatory frameworks. I’d love for it to be quicker, of course, but I’m relatively empathetic.”
In general, banks’ direct contact with cryptocurrency markets has been limited, and only a handful of banks globally have reported having crypto exposure, according to a Bank for International Settlements paper published in May.
But, as crypto enters the mainstream, clients could become more interested and look for greater exposure to the digital asset market, which could mean there’s a chance banks might have to take it more seriously soon.
Even though there is market volatility, Mercer said the downturn in 2022 won’t impact the market in the long term. He compared it to Amazon’s stock, which went from about $188 in 2021 to $101 in mid-June 2022. “It didn’t make a huge impact because Amazon is still successful today,” Mercer said.
“We can look at 2022 as just a blip,” Mercer said. “If you look at the graph of crypto from the beginning, [bitcoin’s price] jump to the $60,000s looks like a blip, but so does the drop to about $5,000 in 2020.”
In July, market players told TechCrunch that there is significant institutional interest in decentralized financial (DeFi) markets as they may prove more resilient than other crypto networks in regard to shaky macroeconomic environments. Both crypto-native and traditional institutions have said that DeFi services like smart contracts have the potential to solve problems that led to the current market turmoil.
Earlier this year, Goldman Sachs tested the crypto waters as the first major U.S. bank to execute an over-the-counter crypto options trade with Galaxy Digital in the form of a Bitcoin non-deliverable option. Although the firm didn’t directly engage or hold the underlying crypto, it took an option with a payoff settled in cash.
Although institutions are holding out, it seems like until government regulators provide clarity, banks won’t be able to engage directly in the crypto market. But that doesn’t necessarily mean they’re not closely watching the space — as Mercer noted with those 14 unnamed banks using LMAX data — it could mean they’re just waiting on the sidelines.