Integrating Cryptoassets to an Existing FX Architecture
Preparing for a new generation of finance
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As demand and appetite for cryptoassets continues to take hold in the capital markets landscape, both retail and institutional investors are increasingly incorporating cryptoassets into their investment portfolios, and also as a method of cross-border payment. This growing demand has presented the opportunity for institutions with extensive FX set-ups to expand their offerings to include cryptoassets. This article will explore how institutions can leverage their existing FX technology and infrastructure to provide cryptoasset offerings to their clients.
Source: GreySpark Analysis
The model above shows four key ways in which FX technology stacks can be re-purposed to facilitate cryptoassets.
Trading platforms have been refined over several years to offer a wide range of currency pairs and sophisticated trading tools for the FX market, which can now be adapted and repurposed to include cryptoassets. This adaptation involves adding cryptoasset pairs, integrating real-time market data from crypto exchanges and network nodes, and enhancing user interfaces to support features specific to crypto markets, such as staking or futures.
Similarly, the pricing engines that traditionally aggregate liquidity from various sources for FX can be enhanced to handle the more volatile and fragmented cryptoasset markets by connecting with multiple crypto exchanges and implementing algorithms capable of managing higher volatility. Smart Order Routing (SOR) systems, which are crucial for achieving best execution in FX, can be upgraded to connect with a broader range of crypto exchanges. Enhancements should focus on exploiting price disparities and managing the rapid price movements typically found in crypto markets, ensuring timely execution and minimal slippage.
Compliance and reporting mechanisms are also crucial, especially given the evolving regulatory landscape surrounding cryptoassets, with the European Union acting as a trailblazer in this regard with its Markets in Crypto-Assets Regulation, effective from December 2024. Financial institutions should update their compliance systems to address specific requirements related to cryptoassets, including tailored anti-money laundering (AML) processes. Additionally, reporting tools must be expanded to cover detailed logging of trades across multiple blockchains and exchanges to ensure regulatory compliance and satisfy internal audits.
Firms looking to repurpose their FX technology architecture to accommodate cryptoasset offerings should adopt a structured approach to ensure a smooth transition and successful implementation. Initially, firms should conduct a comprehensive review and audit of their existing systems to identify those components that can be adapted for cryptoassets and those that may require replacement. This evaluation should consider both in-house systems and those provided by external third-party vendors, assessing the flexibility, scalability, and compliance capabilities of each. For in-house systems, firms should mobilise their IT and development teams to update and test the technology in line with the new requirements. Where systems are vendor-provided, firms should regularly engage with their vendors to discuss necessary modifications or – if not possible - explore new vendors and products better suited for handling cryptoassets. Effective vendor management will be crucial; firms must ensure that their service level agreements (SLAs) and contracts reflect the new operational and compliance demands.
The strategic decision to adapt existing FX technology to facilitate cryptoassets represents not just an adaptation to current market trends but a proactive move towards the future of financial markets. As cryptoassets continue to gain momentum in the financial landscape, institutions that leverage their established FX capabilities to embrace these innovations position themselves at the heart of a financial revolution. However, this transition is not without its challenges; it requires a meticulous approach to change management, a thorough evaluation of existing systems versus new demands, and a deep commitment to continuous adaptation and development. Firms must weigh the potential benefits of tapping into a burgeoning market against the operational complexities of integrating new types of transactions and compliance measures. As such, institutions must consider not only the immediate implications of adding cryptoassets to their service offerings but also the long-term impact on their competitive stance in an increasingly digital and decentralised financial world.