Worldwide: Building Trust In The Crypto Market

Last Updated: 20 August 2019
Article by Paul Wilden

Most Read Contributor in Netherlands, August 2019

OTC crypto trading is here to stay. With an influx of institutional investors keen to avoid the associated risks, there is a pressing need for a different form of OTC crypto trading - via escrow, with a trusted partner.

The cryptocurrency ('crypto') market appears to be on the rise. Bitcoin, the main digital currency with a market share of over 60%, has seen its price increase from around $4,000 in April 2019 to over $10,000 in July 2019. This is despite concerns about the Dark Web, the global chatter about the recent Congressional hearings on Facebook's Libra, and confusion over regulation.

In tandem with increasing prices, institutional investors look to be getting more involved in the market. Last year, we saw institutional investors surpass high-net-worth individuals (HNWIs) for the first time in terms of purchasing cryptocurrencies. It's fast becoming part of a diversified investment strategy. Whilst there is still a strong UK/US footprint, we're seeing deals in Switzerland, Hong Kong and Canada.

The speed of professionalisation in the cryptocurrency market has ramped up, with much of the recent growth driven by more efficient financial infrastructure. This is helping financial institutions to take a more considered look at crypto, and use it to revamp their portfolios. As of July 2019, the total market capitalisation for these digital assets in circulation was just under $300bn. It's likely that this will rise above $300bn in the near future, though longer-term prospects depend on how the industry adapts to upcoming regulatory framework, with the likes of the Financial Industry Regulatory Authority (FINRA) looking to apply rules that will provide a more stable platform to trade digital assets whilst reducing risk.

Trading volumes have been boosted by a sharp rise in over-the-counter (OTC) trading as crypto projects look for liquidity. In the so-called 'Crypto Winter' of 2018, crypto-centric OTC desks, including Genesis Trading and Circle (backed by Goldman Sachs) started reporting tremendous growth and this trend is continuing. According to research by Diar, over 25% of Bitcoin in circulation now sits in addresses that have a balance of between 1,000 and 10,000 BTC – volumes that point to financial institutions.

These institutional investors opt for OTC trading as opposed to spot exchanges for a number of reasons. Exchanges often have low liquidity in their order books which rules out large orders, OTC allows large orders without an unfavourable impact on the price, and exchanges limit the total number of Bitcoins that can be traded in one go – Coinbase, for example, has a daily trading limit of $25,000.

That said, there are a few complications that both buyer and seller could run into when they want to set up an OTC trade. There is often no guarantee that the asset will be delivered or cash paid. Most OTC brokers don't provide an appropriate settlement solution, which increases the settlement risk. 

A safer trade

However, there is a different avenue that institutional investors can explore; the appointment of an escrow agent and the use of a simple tri-party escrow arrangement (or back-to-back bilateral arrangements, if anonymity is required). This approach benefits both sides of the trade as the escrow agent will follow the terms of the escrow agreement, which broadly benefit both buyer and seller. The seller benefits from dealing with a party that has funds to make the purchase, whilst the buyer can be confident a trusted independent party won't release funds until the digital currency has been received.

The escrow agent will always start with a rigorous KYC process as part of the service provided. Once both parties have been positively identified and no red flags are raised, they will move to exchange the cryptocurrency and the cash. Best practice is for the buyer to first run a Satoshi Test. This is a simulated deal with a small exchange of cryptocurrency, backed by cash in escrow, between the address of the seller and that of the buyer to establish a working link to further build on.

Crypto represents a great opportunity for investors and it has a big future. There will undoubtedly be market consolidation, with a small number of the 1,500+ digital currencies in circulation emerging as a favoured core. As institutional investor appetite increases, bigger names will enter the arena. You can stay ahead of the game by using an escrow agent to ensure the trade completes as per the escrow arrangement.

Partner with TMF Group

Our services on the FIAT side of OTC crypto trades via escrow provide comfort to both the buy and sell side, who can be confident that the risks are managed by a trusted global provider equipped to adhere to and comply with the latest KYC and AML regulations.

Reach out to us today to find out more about how we can support your crypto trades.

This article originally appeared in Global Trade Magazine

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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