• There are three significant barriers to institutional adoption – Regulatory Classification, Security of Asset Custody, and an Inefficient Trading Environment. 
  • Regulatory Classification – with cryptocurrency gaining global importance, governments have attempted to regulate the industry through traditional methods.
  • Asset Custody – ensuring that an investment firm’s funds are safe and secure for investors.
  • Lastly, the lack of a healthy trading environment is another reason that acts as a barrier to the institutional adoption of crypto. 
  • FLUID provides a comprehensive one-size-fits-all solution as it combines resources across member exchanges to create a global order book to connect institutions and retail investors.

Cryptocurrencies saw values soar in 2021 when some investors sought a haven from the inflationary pressures. Additionally, retail consumption spiked across the industry, with data revealing that global crypto use had increased by more than 880 percent last year. President Joe Biden’s recent executive order on digital assets and blockchain was a significant step forward. However, financial institutions still need to see more visible progress before diving deep into the industry. 

With the advancement of technology, financial markets have evolved exponentially. As more professional traders enter the digital asset market, it may be tempting to perceive markets from a conventional perspective. However, being a fast-growing, unregulated, rapidly developing sector, cryptocurrency markets have several essential peculiarities. Decentralization and open finance concepts conflict with present legislation and institutions’ environments traditionally operate in.

Decentralized Finance (DeFi) is a new financial system that is trustless, widely accessible, permissionless, and operates without the need for middlemen such as banks. DeFi does this by utilizing Blockchain technology and smart contracts. Due to its comparatively higher security, robust programming language, and large developer environment, most DeFi applications are now developed on the Ethereum blockchain (and its Layer 2 chains). The system decentralizes authority from banks and institutions over money, financial goods, and financial services. 

Today, the idea of decentralized finance stands in total opposition to traditional finance, which is highly regulated and controlled by centralized authorities.

DeFi vs CeFi

  • One of the most significant contrasts between decentralized and centralized finance is that in CeFi, the system is controlled, but in DeFi, the reverse is true. In centralized finance, the exchanges are responsible for securing the users’ money.
  • Customers are typically ignorant of the underlying laws or agreements that govern financial assets and products, making the conventional centralized finance (CeFi) ecosystem opaque to non-experts.
  • Decentralized Finance (DeFi), on the other hand, is making a name for itself as an ecosystem that promises transparency and control, due in part to the underlying integrity-protected blockchain, as well as better financial asset returns than CeFi systems.

Industry Barriers to Institutional Adoption

Traditional securities exchange operators such as stocks, options, and derivatives, face the existential choice of cooperating or competing with crypto. As a result, exchanges must acknowledge and react to the growing importance of cryptocurrencies while still rejecting the core concept of crypto, which is a decentralized financial system without the need for intermediaries.

While individual governments formulate and enact legislation, there is no global legal framework for cryptocurrency, and because cryptography is a global phenomenon, those restrictions are insufficient.

There are three significant barriers to institutional adoption. They are:

  • Regulatory Classification 
  • Security of Asset Custody
  • Lack of Healthy Trading Environment 

Regulatory Classification

Governments worldwide are split on regulating crypto as it transitions from speculative investment to a balanced portfolio. As cryptocurrency has grown globally, governments have attempted to regulate the industry through traditional methods. Unfortunately, due to the lack of consensus and legislation globally, cryptocurrencies are classified and taxed differently.

Considering bitcoin as an example, the map below breaks down the legal status of bitcoin around the world:

crypto legal status image


Security of Asset Custody

In cryptocurrency, asset custody is a fundamental issue to address. It assists in ensuring that an investment firm’s funds under management are safe and secure for any investor. In addition, investors want to be assured that their funds are accessible throughout and not redundant in a bank account.   

In contemporary culture, trust scales poorly, and one of the key goals of crypto assets is to help trust scale up in an ambiguous environment. Furthermore, to function as a payment system, any form of money must be simple to transact with, easily identifiable or verified by users, and convenient to carry.

Unlike conventional banking goods and providers, who have had years to establish how their products and solutions work, the market for digital assets and their custody is still in its early stages. As a result, there are many other options available today, each with its own set of tactics and strategies, especially when it comes to safeguarding assets. A uniform approach to custody should emerge as the market develops, but it will require close coordination between major market stakeholders, regulators, providers, and customers.

Lack of Healthy Trading Environment

Last but equally concerning is the lack of a healthy and efficient trading environment. Apart from the legal framework, this also prevents institutions from entering the market. High spreads, narrow order books, price discrepancy, lack of market stability, and other factors contribute to liquidity fragmentation. As a result, institutions are hesitant to enter the market because they are concerned about a risky trading environment.

How Does FLUID Help?

FLUID provides a comprehensive one-size-fits-all solution as it combines resources across member exchanges to create an order book to connect institutions and retail investors. FLUID understands the challenges that compliance exchanges and virtual asset regulatory frameworks will bring to the industry. FLUID can help member exchanges adapt to these challenges through KYC and AML standards and “travel rule” compliance with this knowledge. In addition, this allows for efficient access of data, when needed, for all exchange partners.

With FLUID’s innovative technology, multitudinous transactions are settled instantly and simultaneously across all chains, exchanges, and trading pairs using a blockchain-based solution overlaying an MPC wallet architecture. FLUID aims to aggregate liquidity in a unique, innovative, and efficient way to tackle this. In addition, FLUID aims to be a regulated platform that will allow users to trade digital assets in a compliant way.