Andy Flury is founder and CEO of Wyden, a company providing institutional trading technology for digital assets.

Over the past nine months, Bitcoin has seen a surge of around 50 percent. Blackrock, the world's largest asset manager, has applied for a BTC ETF. And Germany's largest credit institution, Deutsche Bank, is currently in the approval process for a crypto custody license. Added to this is MiCA and thus increased regulatory security for institutional investors. All this leads to institutional adoption being at a significant threshold – which makes the decision for the right infrastructure all the more important.

However, things looked quite different in the crypto market last year. In the crypto winter of 2022, Terra-Luna and Celsius stumbled, Three Arrows Capital was ordered to liquidate, major players such as Gemini, Genesis and Grayscale fought legal battles with the SEC, and in November FTX had to initiate insolvency proceedings and the crypto market valuations took a big hit.

In addition, in early 2023, the insolvencies of US banks – Signature, Silvergate, and Silicon Valley Bank – had profound effects on crypto trading, established procedures, and the related venture capital market. This made it clear that the rules of traditional finance, economics and governance did in fact apply to the crypto market.

Looking back now reveals many weaknesses in this market that are currently being addressed. A look into the future shows that the institutional adoption of the new asset class is at an important threshold. Even more so as the EU’s MiCA regime will come into force in less than a year, offering European banks a significant market advantage – especially as the United States is falling behind due to its upcoming presidential election.

Similar to traditional assets, cryptocurrency trading includes various functions such as custody or brokerage. These are strictly separated from each other in the TradFi sector as part of stringent risk management policies. However, at FTX & Co, this governance principle was ignored, leading to a cascading negative impact and eventual downfall. Banks should therefore ensure that internal governance guidelines exist and are adhered to when connecting to crypto exchanges and other service providers.

As banks chart their digital asset strategy, they confront a market riddled with fragmentation with hundreds of centralized and decentralized crypto exchanges, OTC desks and brokers. To ensure a best execution policy for itself and its clients, which is also required under MiCA, among other things, a bank must connect multiple trading venues to its own platform. These can have large variances in price and liquidity, which can be exploited opportunistically through smart order routing to get the best average price spreading a single order across multiple venues.

Diversification is also advisable in the context of risk management. A singular trading venue's collapse could spell a catastrophic asset loss. Connecting several trading counterparties increases the complexity and liquidity costs of a bank, but significantly reduces the risk of default. Rigorous vetting of trading counterparties is necessary as part of the due diligence process in order to clarify liability issues in advance. Here, for example, it should be determined who is liable if a downstream trading platform used by a trading counterparty runs into payment difficulties.

The recent downfall of US banks, Signature and Silvergate, cast a long shadow, affecting not just their clientele but the broader crypto trading ecosystem. These banks had facilitated instantaneous USD transfers to crypto exchanges, thereby minimizing assets held at these venues. Current cash management alternatives, however, seem to be in their infancy.

While stablecoins grapple with volatility and transactional delays, SEPA offers instant liquidity in euros. Yet, its transactional caps and limited market reach pose challenges for institutional trading. And FedNow, the instant payment service launched by the Federal Reserve, has yet to establish itself to achieve the desired network effects. Off-exchange settlement solutions via providers such as Copper ClearLoop or Fireblocks are the most likely to provide an effective means of efficient cash management – allowing funds to be transferred instantly to exchange accounts prior to a trade.

In addition to a centrally managed liquidity pool, the automation of liquidity management is a useful component of smart cash management. Individual functions such as pre-funding, rebalancing or payment settlement are automated. Another modality is dynamic cash management: in this way, money parked with crypto exchanges can be increased during trading hours and reduced or withdrawn completely outside of trading hours.

The technical implementation of trading cryptocurrencies requires a bank to connect additional systems to their core banking infrastructure. A custodian suitable for institutional-grade trading secures the private keys that enable safekeeping of client assets. Furthermore, a trade order execution system that can access various crypto exchanges is needed.

Finally, a solution is needed to orchestrate all functions described above, as well as to integrate other functions such as liquidity or risk management. The Wyden platform is currently the only one to offer such a range of functions. In their digital asset strategy, banks must remain attuned to their unique needs, risk profiles, and customer demographics.

Established financial institutions have clear incentives to further their digital asset strategies. From a bank's viewpoint, among the four current business cases—crypto, NFT, DeFi, and tokenization—only crypto has consistently demonstrated clear market demand and assured revenue potential for institutions. From a retail or investor perspective, a regulated bank's digital asset offering presents an elegant solution – bridging the need for security and convenience.

A regulated bank as a "trustee" of cryptocurrencies ensures safekeeping of customers wallets. In addition, access to crypto and digital assets is greatly simplified as the bank acts as a one-stop shop for all asset classes – from traditional to digital assets. Wealth advisors can provide comprehensive risk management education and help with portfolio diversification. The expansion of the bank's own offering, e.g. via staking, increases customer convenience, provides the bank with valuable data and further touchpoints, and at the same time makes it a central, trustworthy partner.

If banks manage to learn from the mistakes of the past crypto winter, nothing will stand in the way of institutional crypto trading coming of age. The technological prerequisites of a professional and integrated trading ecosystem are there. The task now is to implement them across the board in the banking sector – even more so as MiCA will add increased regulatory certainty for financial institutions.

Considering the evolving landscape, it's evident that beyond just infrastructure, regulation is pivotal for an institution's digital asset strategy. This will inevitably lead to diverse regulatory regimes across different regions, significantly influencing their attractiveness. Consequently, for European banks in particular, it's imperative to not only build internal knowledge and infrastructure but also to stay abreast of these regulatory shifts.

This is a guest post by Andy Flury. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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