Current State of Crypto Capital Markets for Institutions

Current State of Crypto Capital Markets for Institutions

USDC Capital Markets


The state of capital markets is important to the utility provided by Circle’s USDC and the increasing blockchain interoperability that helps to provide liquidity for crypto capital markets. These characteristics can help institutions moving into the crypto space by providing them a stable, secure means for accessing crypto capital markets.

In a panel from Converge, leaders discuss the current state of crypto capital markets for institutional adoption, from a variety of perspectives. During the discussion we have members from CeFi, DeFi and TradFi businesses, as well as those still working out how crypto capital markets can best be used to improve their own offerings and services.

Let’s take a deeper look into how some of these players in the crypto capital markets see the future of institutional adoption of blockchain technology.

(Converge22 Panel - Current State of Crypto Capital Markets to Institutions)

The DeFi Perspective

One of the most exciting recent developments is the increasing awareness of how decentralized finance is an improvement over centralized finance. The transparency provided by DeFi protocols and dApps has proven to be a major benefit, allowing for a reduction in systemic risk for capital markets by allowing anyone to see the health of every user within the ecosystem in real-time.

“There’s an advantage to a market where products are radically transparent.” - Robert Leshner, Founder, Compound Labs

DeFi avoids many of the problems associated with traditional financial models. During the problems seen in centralized lending and exchanges in 2022, the DeFi protocols held up under stress, providing a proof-of-concept for the protocols and their use in capital markets. Institutions continue to be very interested in entering crypto capital markets through DeFi.

More recently, USDC passed its own stress test following the failure of Silicon Valley bank.

The CeFi Perspective

Systemic risk in capital markets is very different when looked at through the lens of centralized finance providers. In traditional CeFi, it can take weeks to onboard new institutions onto platforms, which can often lead to lost opportunities. For this reason, CeFi platforms see the benefits of integrating DeFi protocols into their processes.

DeFi protocols can be a way to encompass “intelligent, risk-based decisions that do asset allocation on behalf of consumers that have no idea how to do these themselves.” Bill Barheit, Co-founder and CEO, Abra

This holds true for consumers, high net-worth individuals, and institutions who use Abra for treasury.

One potential trend is that institutions will begin to create platforms that combine DeFi with traditional risk management solutions from CeFi, leading to far greater institutional activity in crypto capital markets.

Stablecoins are likely to participate in this trend, through laws and regulations that allow for stablecoins to be used as payment under banking regulations. This could create a regulated asset upon which CeFi can build an infrastructure for institutional activity in crypto capital markets.

The Supply of Digital Dollars

The current observation is that central banks have significant influence on lending, borrowing, asset valuation, and the movement of funds, emphasizing the value of decentralizing money for greater efficacy. Moving money to the blockchain can avoid many of the issues that come about due to the fiscal and monetary policies of central banks.

“The opportunity to get that right, with the regulation that is coming out, and thinking about how you borrow and provide capital and equity on-chain, can really lead to a very different way to think about debt, and the issuance of value in the future.” - Chris Zuehlke, Global Head, Cumberland - DRW

One of the innovations of DeFi is the concept of overcollateralization, which is finding its way back into CeFi. This mechanism has helped to stabilize crypto capital markets by ensuring that borrowers are able to repay by simply locking up more than they are borrowing, thus removing the human component in risk management. 

Institutions are increasingly embracing overcollateralization as a proxy for creditworthiness. It’s also easy to automate this on blockchains through the use of smart contracts.

One downside, at the moment, is that decentralized platforms aren’t really prepared to accept the level of capital that institutions can bring to the table. However, that is gradually changing.

The Path to Greater Adoption

In many ways, DeFi and CeFi are still in their infancy. Protocols continue to improve, and the coming years will bring great innovations in usability and interoperability. This is where capital markets could really benefit and institutional adoption will flourish.

A good analogy is in the internet space. In the early days, users needed to install and configure complicated software just to browse the Web. Now browsers come pre-installed on every device, and they’re the default mode of interacting with the Web. In a sense, they’re “invisible.”

Similarly, Web3 is very much in these early days: it can be clunky and hard to use. But as the technologies become more usable and interoperable, without the need to install and understand wallets, protocols, and private keys, we may see adoption from a broader audience..

Regulations are also expected to improve the landscape, making it possible for large institutions and banks to participate in the crypto space in a more meaningful way.

“I think it’s a really interesting evolution of regulations. The existing regulations just never contemplated [DeFi] pre-internet, pre-television in a lot of cases. And here we are trying to basically figure out how to regulate smart contracts.” Bill Barheit, Co-founder and CEO, Abra

The crypto industry will continue to grow, but it will require an enormous amount of education for both retail and institutions. If you want to hear more about capital market infrastructure, listen to our recent webinar, “Helping Solve the Emerging Markets Liquidity Gap with USDC”.


Helping Solve the Emerging Markets Liquidity Gap with USDC

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