Finadium: Securities Finance at the Gates of Crypto

This report surveys the current state of the crypto and crypto financing markets as seen through the lens of the traditional securities lending and repo markets. The report identifies parallels and differences between crypto and securities markets, provides a technical and business primer on the main crypto concepts, and offers directions on how securities industry clients and business practices might line up with crypto going forward.

Traditional securities finance (securities lending, repo, collateral trading) market participants see opportunity in the crypto space. This is a client-driven conversation that is leading large firms to create new divisions to trade and custody assets. It may wind up being a major success or a hedge just in case crypto turns into something big, or may close down in a few years. Either way, crypto has captured significant and high level attention at many institutions. The next phase will be developing safe, trusted business models for clients to finance their crypto assets alongside their existing securities businesses.

The crypto markets have developed their own protocols, terminology and in some cases their own products to deliver financing. Market participants in securities finance are aware of this progress on the edges, and have been told of lending rates that rival or exceed the hard to borrow securities market. As traditional securities financing has been strained by monetary policy and regulatory limitations, the crypto market could present an exciting growth opportunity.

The challenges in compliance, counterparty risk, market liquidity, client safety and outright fraud are significant, however. Securities firms will need to carefully evaluate how comfortable they are with exposing both their and their clients’ assets. Some elements of the crypto market are unacceptable today for basic client protections in the securities industry. Prime brokers and custodians are starting to work their way through these issues, and we document how securities finance can solve some of the toughest problems.

This report should be read by any participant in the securities finance markets across securities lending and repo. Advisors, technology providers and regulators may also have an interest in learning how the burgeoning crypto markets may become the newest frontier for securities financing businesses.

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