Crypto Updates

FX-Like Funds Segregation Can Save Crypto Markets


In the second part of our two-part article on crypto market structures, Finance Magnates considers the likelihood of the crypto market eventually adopting the same structures as the FX OTC interdealer market.

The phrase ‘there is more that unites us than divides us’ has been used in various ways by many politicians over the years as they sought to heal divisions in their parties or nations. But, it could equally be applied to the FX and crypto markets, where fragmentation and the absence of a single regulatory authority are just some of the common factors.

The collapse of FTX highlighted shortcomings in the segregation of customer assets and measures to prevent firms from trading against their customers. Traditional financial market infrastructure (such as in the FX market) benefits from the compounding effects of both operational procedures and regulations that have been developed over time in response to different market failures. The concept of segregating trading and custody is one of the results of this evolution.

Segregation of Customer Funds

Tom Flanagan, Digital Assets Head of Platform Trading at TP ICAP

The crypto asset market would benefit greatly from embracing this model to provide new market participants with the necessary confidence, suggests Tom Flanagan, the Digital Assets Head of Platform Trading at TP ICAP.

“This segregated model is proven to mitigate conflicts of interest – and the single point of failure risk – that arise from co-mingling asset custody with trading,” he says.

Markets Should be Transparent

Another element of the FX market structure that Flanagan reckons crypto would benefit from is the transparency and liquidity analytics accessible within wholesale FX venues.

“Most crypto venues are anonymous with a lack of information detailing the type of flow and the market participants involved,” he says. “Statistics such as fill rates and round-trip time (along with more advanced analytics such as pre and post-trade mark-outs) provide clients with better information on the types of liquidity their firm is dealing against in an anonymous marketplace and whether it is a…

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