In the second part of an interview, Shane Edwards (pictured), a former equity derivatives structuring banker, and head of investment products at digital asset financial services and advisory company Diginex, talks about barriers for adoption of cryptocurrencies and blockchain, and the opportunity to transform the risk properties and the technology at hand to build a derivatives and structured products ecosystem of these assets.
Cryptos and blockchain are being pushed, not by the traditional financial institutions, but by independent exchanges, fintech firms and other new product providers. However, Edwards sees an increasing interest from traditional players wanting to be part of the story.
“Over time I’d expect to see a lot more activity from traditional banks dealing with digital assets and the digital asset eco-system,” he says. “There needs to be significant money pointed towards the technological infrastructure needed to make that happen, or likely seeing more partnerships with fintech firms, but already a lot of changes are happening across a range of industries speeding up settlement processes, reducing counterparty risk and strengthening the integrity of information stored in the blockchain, which in turn can reduce a range of costs relating to the editing and retention of traditional business contracts.”
The mantra I keep repeating is all about embracing regulation to inspire the trust of customers
There are several reasons why investment banks have been reluctant to move into crypto currency trading, adds Edwards. “Some of it has to do with the fact that a different technical infrastructure would be used, but they have other concerns also which could be mitigated and may reduce over time.”
The first transaction of a structured product linked to an ETF on blockchain was done in 2018. The technology is there but adoption does not seem to be happening. What are the reasons for this?
Shane Edwards: Certainly, education is an important factor - increasingly people throughout financial services are able to speak about the advantages of blockchain and how it works. That wasn’t the case even just a couple of years ago. However, even when future benefits are well understood, changes to the technology stack and business processes come with an immediate cost and will have to be weighed up against other urgent projects, given the limited IT budgets and bandwidth.
The initial focus will be operating a crypto currency and digital asset exchange
What is Diginex’s strategy to promote this segment of the market?
Shane Edwards: The mantra I keep repeating is all about embracing regulation to inspire the trust of customers and also to generate long-term sustainable success. Diginex is striving to be a very visible, transparent firm and this is why Diginex itself seeks to be a listed company in the foreseeable future.
The initial focus will be operating a crypto currency and digital asset exchange, which is going to be an institutional-grade proposition catering to their specialised and demanding needs. Underpinning this, as well as the broader growth in the trading of digital assets, Diginex has recognized there is a material gap in the quality and availability of digital asset custody services, so Digivault seeks to offer a state of the art solution for that rapidly growing market.
Furthermore, Diginex will play an active role in bringing more digital assets to market. Utilising considerable expertise in the technical and practical advantages of blockchain solutions, coupled with a deep understanding of the requirements of asset originators and potential buyers, Diginex is uniquely positioned to help this market flourish and to accelerate the capabilities of many traditional financial firms interested in pursuing this route.
What kind of products does Diginex offer at the moment?
Shane Edwards: In addition to the digital asset exchange and custody product, as well as capital markets digital solutions, Diginex also runs a fund of crypto hedge funds. The team who built and maintain this innovative product are of course familiar with traditional due diligence requirements that you might apply to conventional hedge fund strategies, but have paid special attention to the nuances that this asset class presents.
My focus, in particular, will be on developing new products leveraging my knowledge of derivatives and structured products. There’s a huge gap - not only in crypto-themed products or digital asset products diversifying regular portfolios, but if the huge liquidity in spot trading is anything to go by, there’s even larger scope to build the necessary foundations, right now, in order to the see a sizeable derivatives market really flourish. The opportunity really is right now, the industry needs contract specifications and other key components of market architecture to be developed rapidly.
Where do you want to be in the next few years?
Shane Edwards: Diginex aims to be an industry leader in terms of investment grade digital asset products and solutions. I think that’s achievable, but the whole industry has a way to go even if things are happening at a more rapid pace than ever before. In addition to establishing a thriving digital asset derivatives market, I keep coming back to the convergence between traditional finance and traditional venues as trusted partners to be embraced, particularly in order to reach the mass market in an effective way and roll out suitable education so that clients can access alternative sources of growth and yield, which really are unique and hopefully to their considerable benefit.
Structured products can play a key part of this. All the way from basic tracker products, which are easy to access, through to structured products with their unparalleled ability to tailor an investments risk and return profile. For example, popular and useful products like accumulators and decumulators on cryptocurrencies could rapidly gain traction and with investors seeking out alternative forms of yield, reverse convertibles could look very attractive. There’s many different ways to transform the risk properties and build a derivatives and structured products ecosystem.
Where's the growth coming from? What are you thinking of in terms of products?
Shane Edwards: Crypto currency has been an interesting portfolio diversifier for longer term investors and, for short term traders, its volatility has also offered an exciting opportunity set. Bitcoin is still the flagship cryptocurrency and we think it will continue to be a very topical story in 2020 for many reasons. In order to support the economy during the recent pandemic, there are fears that increased government debt and money supply could lead to currency devaluation, which is in stark contrast to Bitcoin, for example, which has no national debt attached and has a strictly finite supply.
Furthermore, the Bitcoin ‘halvening’ is set to happen imminently, which reduces the incentive paid to Bitcoin miners and could therefore lead to constrained supply bandwidth just as demand could be rapidly growing.