Cryptocurrencies – Time to Understand the Products, Risks and Benefits

Cryptocurrencies and the distributed ledger technology behind them are changing the way the world thinks about financial transactions, settlement, and trading. Just in the last few days, major Wall Street firms have announced trading desks to focus on cryptocurrencies and two major US exchanges, NYSE / ICE and NASDAQ, are rumored to be considering trading cryptocurrency products. All this comes on the heels of launches by the CME and CBOE of trading in BITCOIN index futures. In addition, some of the major discount retail firms are now allowing their clients to trade BITCOIN futures in their accounts.  The heads of the CFTC and SEC have announced plans to sort out the possible future regulatory structure of the cryptocurrency market, while various state regulators have also started to weigh in on regulation of these growing markets. But a decade after the launch of BITCOIN, debate continues about the appropriate path forward and whether these products should be allowed to exist. Headline-grabbing stories about fraudulent transactions, wild price swings, stolen “wallets,” and misuse by hackers and terrorists created a cloud of distrust, but that cloud may also be a result of the secrecy behind the genesis of BITCOIN. That said, blockchain’s distributed ledger technology has become widely recognized and applauded for its security and data integrity. Despite currently having a significant limitation to process transactions in a marketplace where microseconds matter, the future opportunities are tremendous and solutions to its limitations are already being discovered.

What Your Firm Should Be Doing:

There are many “cryptocurrencies” available that, as of this writing, are worth hundreds of billions of dollars in market capitalization. Now is the time to make sure that you break through the hype and skepticism and educate yourself on the products, technology, and marketplaces where they trade. As you start down the path, it may help you to stop thinking about cryptocurrency as a thing and instead consider it as a category of things.  A type of asset with various classes may be a better way to start –  currencies, notes, equities, and even hybrids of those classes in digital form. Once you thoroughly understand the products, only then can you start to understand the features, benefits and risks they present. Then, if you determine they are appropriate for your client base, you can start to address the operational challenges related to sales, trading, settlement, and custody of digital assets. You also need to carefully consider how to apply existing regulations to these emerging products.

How Oyster Can Help:

Oyster consultants have worked to create exchanges, ATSs, FinTech firms, and innovative financial products.  We have worked with our clients to create new approaches to manage risk and compliance, client suitability, information security, data integrity, and trade, settlement, and counterparty controls. Most importantly, our consultants have helped our clients to create businesses that succeed and to develop an approach that appropriately manages the risks associated with creating platforms that foster innovation, attract capital, and create trading and investment opportunities for investors and market participants.