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Crypto held back by lack of liquidity, interoperability
Growing appeal among Asia's tech-savvy millennials, unbanked represent huge opportunity
Tom King 6 Sep 2021

This year is proving to be a significant year for crypto assets, with the global market cap reaching a new all-time high, institutional interest growing, and innovations like non-fungible tokens keeping crypto in the headlines.

A recent survey found awareness of cryptocurrency continues to rise in Singapore and its appeal among Singaporean investors is broadening. However, many potential investors still lack knowledge and understanding of digital assets holding them back from investing.

The Asset recently spoke with Don Guo, the co-founder and CEO of Broctagon Fintech Group, a licensed multi-asset liquidity and technology solutions provider headquartered in Singapore, on developing crypto exchanges in Asia and what he thinks its crypto markets will look like in the future.

TA: What is holding back the progress of newer crypto exchanges in Asia? Is it purely a regulation issue or are there trust issues for investors?

DG: While it is a wider industry problem, the lack of liquidity in the cryptocurrency market is the biggest issue that the newer exchanges in Asia, and globally, struggle with. They are hoping for more market makers so that there's more liquidity and transparent pricing. As they look to establish themselves, they are also struggling with a small number of users, low order frequency, low trade volumes, drastic price disparity and huge settlement costs for users. The reality is that building an order book that can rival top exchanges requires heavy capital and resources.

While external factors like regulation and investor trust issues impact the market sentiments, in the long run they are expected to be sorted out. Because of these factors, even though the market might plummet for a bit, it eventually bounces back. There is certainly a journey to be made for the regulators to ensure the crypto markets are stable and the trust of investors heightened, but we will get there.

Southeast Asia is a vibrant market for the growth of cryptocurrency exchanges. While digital exchange operators see huge potential, more players will mean stiffer competition which is another issue they’ll need to tackle.

TA: Despite being seen as cutting edge and disruptive to the traditional financial industry, is there anything the crypto industry can learn from the conventional financial institutions?

DG: The traditional financial industry works on a strong regulatory foundation and there are huge opportunities for us to implement similar standards in the crypto markets. What the crypto market is going through now, especially the liquidity problem, is something the forex markets have already tackled and mastered.

Crypto has the benefit of seeing how traditional finance has played out. We expect that the implementation of change and its results in the crypto space will be much faster compared with what it took forex, due to prior experience and improvements in technology.

TA: Is there a model/blueprint for how crypto exchanges should be developed and launched in the future that you think is a fit for Asian investors?

DG: Despite crypto being more widely accepted these days, it remains a “Wild West”. There is no dominant technology and standard in which crypto trading operates. Each exchange functions on different protocols, both technology and process-wise, which makes it difficult for them to interact not just with external entities, but also among themselves.

There is an evident need to standardise processes and technology for the crypto industry in the future, which will also infuse liquidity in the ecosystem. As crypto assets become more liquid, trusted and accessible, ownership and trading will grow steadily.

Regardless of their geopolitical location, what we see is that regulators typically refer to existing compliance structures to formulate a regulatory framework for crypto. While they can differ in scope and degree, these proposed regulations observe common financial requirements, such as know your customer and anti-money laundering. In this sense, crypto is gearing towards greater standardization and an eventual common standard on which all exchanges/brokers operate, be it technically or operationally as a sign of its maturity.

TA: Is there any new innovation on the horizon that will expedite the growth in crypto markets in Asia?

DG: There are enough opportunities for innovation, but the area of liquidity is where it is needed the most. We need to level the playing field where all kinds of exchanges can thrive and there is no monopoly by a handful of bigger exchanges. Automated market makers, in particular, are changing the game by eliminating the need for order books entirely and replacing them with liquidity pools. Broadly, there are continuous innovations in blockchain technology, but not enough at the exchange and trading level.

TA: How can cross-chain interoperability be the significant enabler of liquidity?

DG: Clearly, interoperability between blockchains is the need of the hour. Cross-chain liquidity aggregators address issues prevailing on decentralized exchanges by aggregating liquidity sources from various decentralized exchanges across chains and their own cross-chain pools.

Blockchain protocols are in a state of “free for all”. And, in the past few years, we have seen a drastic increase in the choice of protocols that can be used. With that in mind, compatibility arising from cross-chain interoperability will allow ease of access to various cryptocurrencies; especially for decentralised exchanges.

As blockchain technology continues its move into the mainstream, more players and blockchains will be involved without doubt. In that sense, cross-chain interoperability will play an even greater role to accommodate this diversity in the ecosystem.

TA: What are the biggest issues plaguing the crypto markets in Asia?

DG: The lack of liquidity is the biggest issue that the industry faces. Cryptocurrencies remain extremely volatile, and this volatility serves as a double-edged sword, both as an exciting asset choice for investors and a cause of apprehension among others, holding back its widespread adoption.

A tweet from Elon Musk is all it takes to cause wild fluctuations in bitcoin’s value, for example. The volatility of bitcoin suggests that both consumers and merchants bear exchange-rate risk, which arises from the need to change fiat currency to bitcoin.

Moreover, the current crypto liquidity landscape is not friendly towards traditional financial institutions. While there are institutions that currently invest in crypto, a lot of this is done manually, instead of it being an automated process. This aspect has, for the most part, acted as a barrier-to-entry for mainstream institutions, and has kept crypto a “fringe” investment.

In the current liquidity scenario, the challenge for the smaller crypto exchanges is that they must spend a lot of money to acquire enough liquidity for their businesses through market makers, and sometimes bigger exchanges, and this reflects in the price on their platform.

Security is another big issue plaguing the crypto markets right now. Asian regulators are quickly adapting to the crypto landscape, with rules set in place for crypto exchanges in many countries including Japan, South Korea, Singapore, Thailand to name a few. While players and regulators look to regtech to tackle security issues, at Broctagon we are attempting to resolve the liquidity issue through Nexus 2.0, our proprietary crypto-liquidity aggregation technology. 

TA: What does the future of crypto markets in Asia look like and will the generational transfer of wealth in the region bolster the sector?

DG: Investor protection is the hallmark of any industry we are looking to grow. Government and market participants must implement smart regulations for investor protection in the crypto markets. The future of crypto markets will be defined by this.

Let me highlight the environment closer to home. Singapore is an attractive location for crypto businesses looking for a foothold in the region and also globally.

What works for the city state is that it is pretty clear on how it engages with cryptocurrency and the digital assets markets. The Monetary Authority of Singapore (MAS) has notified several providers of digital payment token services that it is prepared to grant regulatory consent for them to operate in Singapore. The environment created by MAS with regard to regulation, financial markets and blockchain is extremely conducive for crypto businesses.

Crypto is attracting more millennials, who are tech-savvy and open to possibilities. In some Asian countries like Indonesia, more people have smartphones than a bank account. In this way, crypto presents huge opportunities for the unbanked - we see that the potential of them adopting crypto is higher than that of a bank account.

There are more millennial millionaires investing in crypto, as there are more millennial millionaires being brought about by crypto.

There has been a shift in the wealth management industry, as private bankers and wealth management firms look to cater to a crypto clientele. DBS opened their own crypto exchange to cater to select private clients, while Hong Kong has set a crypto trading benchmark for clients - only those with a net worth of more than HK$1 million are allowed to trade crypto.

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