If there’s any doubt institutions are moving fast on crypto asset adoption, take it from a teacher.
In developing the syllabus for Fordham Law and Gabelli School of Business, which both offered my new course on blockchains and crypto assets, I was all too aware of the dramatic changes the industry underwent. The ever-shifting landscape and break-neck pace meant that the class, the guest speakers and myself had to remain nimble, adjusting on an almost weekly basis to innovations in technology and regulatory issues.
We were witnessing and learning in real time as the SEC and CFTC officials made speeches, issued settlements or statements that would shape the industry.
Yet, as we head into 2019, I’m reminded that our industry faces even more urgent questions:
- How will the marketplace find ways to employ digital assets in risk management?
- Is there an overarching framework, a consistent set of standards and terminology for the industry to subscribe to?
- Is the movement to institutional acceptance fundamentally at odds with decentralization?
- What are the market opportunities?
- What role is regulation having in the migration to institutionalization?
Still more important, however, will be a larger question that will define all of the above: Who are our leaders leading the charge to institutional adoption of digital assets?
This answer may prove critical to overcoming the challenge of attaining broad institutional acceptance.
The long move toward digitization
In order to put the dramatic changes of 2018 into context, consider the historical perspective.
In 1992, I was elected Chairman of The Commodity Exchange where during my tenure it merged into the NYMEX to create the largest physical commodity exchange. At that time, the exchanges occupied a 50,000 square-foot column-less trading floor, populated with thousands of people in brightly colored trading jackets, screaming and waving their arms violently to buy or sell a commodity – things such as gold, silver, oil, sugar, orange juice.
If you never had the occasion to visit a vibrant trading floor watch the movie “Trading Places” with Eddie Murphy to get the gist. Though it may seem crazy or inefficient now, those people were doing the work that computers do today. The exchange floor was first and foremost a community, a network, a beehive of activity where millions of transactions occurred and every player had a defined place in an economic ecosystem.
Electronic order books have since replaced bits of papers with scribbled buy and sell orders, but the fundamental rationale for the market and its players remains intact, which is to transfer risk and to provide liquidity for institutional users.
The COMEX-NYMEX merger in 1994 was the first consolidation of the exchanges that began the process of unlocking value, and of rethinking how to be competitive in the approaching age of data availability, computerization and global technological competition. It was a big step toward new product development and the growth of derivatives.
Fast forward to today and many things are not essentially different.
When we think about advancing the use of crypto and digital assets, it is helpful to draw on history. The invention of financial products or asset classes is a complex art. But the adoption of the product and growth of the marketplace takes perseverance and leadership by individuals building out the ecosystem step-by-step for institutional acceptance.
Here again, historical examples can provide insight for developing digital assets and tokens markets.
Dr. Richard Sandor, considered the father of financial futures, helped grow both OTC market participation and the exchanges by speaking to all the potential stakeholders day in and day out. In the most affectionate of ways, I think of Richard going door-to-door selling financially engineered products and educating people about how they can transform risk management as well as investing. He convinced one person at a time, one institution at a time to step in and to build a marketplace. The Chairman of the CFTC recently cited Sandor’s new blockchain book twice in a single speech.
In the early 1980s, the great Leo Melamed literally dragged traders into the S&P pit to spend their quota of time making markets in what became known as “Leo’s folly.” It became the most successful of contracts.
The lesson? Leaders are dedicated, trusted and patient individuals who build a community to expand the marketplace.
Still, in electing this leadership we also need to be conscious of values. In 2018, the move towards institutional utilization came with a step away from decentralization – the core value-add of blockchain-based systems.
Crypto contracts opened on the CME and the CBOE, and ICE put forth its new entrant Bakkt. All are highly centralized marketplaces that institutional players support and trust. Yet, there is no peer-to-peer trading or settlement as in the decentralized models of crypto trading.
But as the market gains traction we should be reminded of the need to reimagine exchange structure and the promise of decentralization for digital assets, and that we need leaders who can help steer us toward this greater goal.
Already, innovative companies with devoted leadership teams are working together to grow the economic understanding of digital assets, to develop functional products, and to build the complicated infrastructure. As we move towards institutional digital assets, new partnerships are being developed, frameworks are being built and alliances forged.
In 2018, the digital asset industry began step-by- step an educational framework for the institutional marketplace as well as for the regulators and also began to produce thought leadership initiatives based on scholarly work. I recommend the following selection: the tokenomics work of Prysm’s Cathy Barbarra and Stephanie Hurder; the blockchain research of Carnegie Mellon’s Giulia Fanti; Todd Lippiat and Micheal Oved’s new approach to real estate tokens (tokenwaterfall.io); and the cutting edge legal work of The Brooklyn Project as well as that of Aaron Wright’s (openlaw.io):
On the partnership side, Fluidity announced deals with Securitize, Propellr and GenesisBlock, all since October 2018. Vincent Molinari (of Templum) and Seedinvest (newly merged with Circle) are continuing to lead the way to ease regulation for crowdfunding.
In 2019, we can expect to see mergers and alliances that position firms to offer digital asset products to institutional investors and to provide creative solutions aimed at building infrastructure and an efficient liquid security token market. The dynamic partnership and configurations within blockchain and a wider set of industries will produce leaders that drive change.
But my hope is to see continued leadership from a new generation of empowered entrepreneurs who can perform a leadership role similar to Sandor, Melamed or myself, driving the process of the institutionalization of crypto-digital assets, and continuing the long-running digitization of finance, already decades in the making.
It is noteworthy and without historical precedent that in 2019 women in leadership positions will have key roles in driving the process of the institutionalization of crypto assets. I look forward to seeing what these women in power will do and say in 2019: Abagail Johnson, CEO of Fidelity Investments, Kelly Loeffler, CEO of Bakkt, Adena Freidman, CEO of Nasdaq, Stacey Cunningham, President of NYSE , Hester Pierce, Commissioner of the SEC and Valerie Szczepanik, SEC Senior Advisor for Digital Assets and Innovation.
I, the first woman chair of an exchange, feel hopeful and certainly in good company.