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LMAX Group CEO Mercer pinpoints ‘ABC’ – adoption, banking and credit – as main drivers to institutional ‘mainstreaming’ of cryptocurrency asset class trading

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Cryptocurrencies and the digital asset ecosystem continue to move towards a mainstream institutional marketplace, with the number of institutional participants either already allocating or planning to allocate to the nascent asset class imminently. 

Cryptocurrencies and the digital asset ecosystem continue to move towards a mainstream institutional marketplace, with the number of institutional participants either already allocating or planning to allocate to the nascent asset class imminently. 

For LMAX Group, this rapid evolution offers a monumental opportunity.  The firm operates five exchanges globally for FX and cryptocurrency trading. The Group’s spot crypto currency exchange, LMAX Digital, is the leading player in the market, serving institutional clients only. The exchange celebrated its third anniversary amid May’s surge in volatility– and has seen a huge uptick in client demand and growth in trading volumes amid crypto’s meteoric rise.

Speaking at Hedgeweek and Institutional Asset Manager’s DigitalAssetsLIVE summit last week, LMAX Group CEO David Mercer (pictured) charted how the group had quickly latched onto the burgeoning sector – and how he now believes the digital and traditional asset classes will align in the coming years, as market infrastructure advances further.

“Way back during the first crypto bull run in 2017, a lot of my leading market-makers and institutional clients started to talk to us about crypto as they needed a credible, efficient and trusted platform on which to trade digital currencies with like-minded institutions,” he recalls of his firm’s initial steps into the digital assets sector.

“We realised that we had all the exchange infrastructure and trading technology required – we just needed to integrate with the blockchains, and from there build out an institutional-grade custody solution.”

Overall, it took around six months to build LMAX Digital, and despite launching in the midst of what Mercer calls a “crypto winter”, it nonetheless became the firm’s fastest growing exchange. While typically it can take some three years to prove the concept of a new exchange, Mercer says LMAX Digital had broken even within six months.

“If you’re an exchange operator, when there’s volatility and prices move, you should do well, otherwise you shouldn’t be in the business,” Mercer says. In May, the trading volumes on LMAX Digital averaged USD 2.5 billion a day and hit a record high of USD 6.6 billion on 19 May.

“We knew more institutions were coming and seriously looking at the asset class. Now in 2021, we’ve seen a widespread realisation that it’s here to stay.”

Expanding further on the ‘mainstreaming’ of the asset class, he concedes the ecosystem is “not yet perfect”, adding that the sector as a whole needs to overcome challenges with A, B and C: adoption, banking, and credit.

“We need greater adoption – the hedge funds, the asset managers, the real money – we need them to come into the marketplace,” he explains.

B is banking. “Proper banks need to come in – and I don’t just mean banks trading it, I mean firms providing banking services for cryptocurrencies. Due to AML concerns, major banks are not banking cryptocurrency exchanges or crypto funds yet. It’s still not a given that if you just call up your bank, tell them you’re launching a digital or crypto operation, and they’ll open a dollar or a yen bank account for you.”

The final element is credit, Mercer says. Industry participants entering the cryptocurrency space are more used to the credit intermediation that exists in traditional capital markets, which is built around prime brokers and central clearing houses.

“The concept of a trusted central credit counterparty doesn’t yet exist in crypto today,” he says. “Trade formations are still bilateral, which is not particularly efficient and instantaneous settlement is not yet a reality, but the technology and the market structure are evolving fast. We have 34 banks connected to LMAX Group on our FX exchanges, and now 10 of those banks are taking our crypto market data because we are effectively the de facto institutional exchange.”

Once the banks with sizeable balance sheets start acting as trusted central credit counterparties, more asset managers and funds will enter the space, he adds. Mercer concedes that cryptocurrency remains a nascent asset class. As an example, bitcoin’s market cap is around USD1 trillion; by contrast FX trades USD 7 trillion daily and the gold market cap is around USD 10 trillion, Mercer says. But looking ahead, he is buoyant about the interest and opportunities in the sector.

“There’s USD110 trillion of assets under management out there today. If 5 per cent of those assets under management were allocated to bitcoin, that would be USD5 trillion,” he says. “I’d be very surprised if you don’t see most of the world’s largest banks trading this asset class actively and offering it as a product and as a service to their customers within 12 months.”

He adds: “Crypto trades 24 hours a day, seven days a week, 365 days a year. There’s no better feeling when you’re a price-maker and an exchange than when your servers are printing tickets and creating opportunities for clients seven days a week.”

Continuing on this theme, he suggests that liquidity in the digital assets market is better than it was a year ago. “I have more than enough liquidity to match USD6.6 billion, which we did on May 19th. Our target is to do 10x, and I have no doubt that we have the names, know-how and the balance sheet to create that liquidity.”

Turning to the evolution of LMAX Group in the future, Mercer outlines plans to launch a new exchange in Asia later in the year, which will be first to operate crypto and FX side by side.

“There’s currently a partition wall between traditional capital markets and asset classes – be it FX or equities or commodities – and crypto. But I actually think that partition will be knocked down within the next five years,” he comments. In time, he believes market participants will be able to trade the S&P500, the Euro, and cryptocurrencies against everything else on a seven-day-a-week basis.

“We love capital markets, and we love the exchange business. We want to be a major part of that in both foreign exchange and crypto,” he adds. “I’m optimistic about the future. Capital markets is all about market access, and a solid institutional foundation bedrock infrastructure benefits everyone who trades in that market.”

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