Wall Street plans to go it alone as it looks down on existing exchanges, dividing the future market into retail and institutional segments.

The cryptocurrency trading is gradually entering the public eye, with traditional finance also starting to offer services. However, rather than acquiring existing cryptocurrency exchanges, Wall Street seems to prefer building its own brand.

Despite facing a series of bubbles in the cryptocurrency market at the end of last year, including asset prices and a string of cryptocurrency platforms like FTX and Celsius, some more mature fund managers still see trading opportunities from price fluctuations and market innovations. In 2023, Bitcoin and Ethereum rose by about 64% and 56%, respectively, compared to the MSCI Global Index, which only rose by about 8.8%.

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Asset Segregation and Regulatory Issues Remain a Challenge in the Cryptocurrency Market

According to a report by FT, traditional financial institutions such as Standard Chartered Bank, Nomura Securities, and J.P. Morgan Wealth Management Group are either establishing their own or supporting new cryptocurrency companies, including platforms for cryptocurrency trading and custody.

They believe that fund managers would trust familiar brands more than the current dominant cryptocurrency exchanges in the market.

Gautam Chhugani, Global Digital Assets Analyst at J.P. Morgan Wealth Management Group, stated:

"When it comes to choosing a counterparty, large traditional institutional investors do prefer to deal with brands that have been around for many years and are regulated by governments."

Following the FTX incident, asset segregation and custody have become the key entry points for traditional finance to enter the cryptocurrency market.

Especially after FT's investigation into 21 CeFi companies, where 8 companies did not respond, the largest market share holder Binance did not respond to inquiries about board members and asset audits.

More details: Financial Times Transparency Investigation, Eight CeFi Entities Refuse to Disclose Information, Bybit and Crypto.com Among Them

Michael Safai, Co-founder of Dexterity Capital, expressed: "I don't want my assets to be custodied by exchanges. Some companies lack asset segregation, which is not very appealing for trading on these platforms, and even somewhat unsettling."

An EY-Patthenon survey this month found that if traditional finance could provide the same services, half of fund managers would switch to trading with traditional financial companies, with 90% stating they trust traditional financial groups more to custody their assets.

The Adults are Here, Kids Beware

Traditional financial institutions currently supporting new cryptocurrency startups or creating their own platforms include:

1. J.P. Morgan Wealth Management Group and Citadel Securities are supporting the EDX Markets trading platform
2. Standard Chartered Bank is backing Zodia Markets exchange and Zodia Custody custodian
3. BNY Mellon has established its own digital assets division
4. Fidelity also has its own digital asset custody division
5. Nasdaq exchange is awaiting regulatory approval to launch its own cryptocurrency trading service

For traditional finance to engage in cryptocurrency trading, asset custody is just the first step, with several hurdles ahead, such as liquidity. Currently, the major trading volume is still provided by mainstream exchanges like Binance. Gautam Chhugani believes traditional finance will take some time to gain market share.

How Long Can Existing Exchange Advantages Last?

Wall Street is building trading infrastructure in a more traditional financial manner. For them, the cloud computing used by current exchanges is too slow, posing risks for market makers unable to provide minimum spread quotes.

However, this does not mean traditional finance will dominate the entire cryptocurrency market.

Usman Ahmad, CEO of Zodia Markets, believes the future will move in two directions: a retail market with larger bid-ask spreads and an institutional market with deeper, more competitive liquidity.