Data-Driven Digital Asset Markets

(Ian Simpson) Kaiko is a market data company for digital assets – one of the most widely used in the industry. What is the data telling you right now about the market?

(Ambre Soubiran) Crypto markets continue to absorb a series of negative shocks stemming from the FTX collapse. We are in the midst of a regulatory crackdown in the United States that is putting pressure on a lot of U.S.-based crypto entities, which were further harmed by the March banking crisis.

We see this series of shocks in the market data we collect, with a notable impact on liquidity and trade volume. Despite the drop in activity, prices have held relatively steady since the start of 2023, with Bitcoin and Ethereum performing better than most equity markets.

This suggests that there is not an abundance of selling activity, with traders preferring to take a “wait and see” approach.

(IS) Many financial institutions have “considered” starting to do business with cryptocurrencies and digital assets – but so far haven’t gotten started. How much of that would you say is because they don’t have good enough data? Do you see them knocking on your door for help?

(AS) 2022 was a turning point when it came to data: the core of the ’22 crypto crisis was a collateral valuation issue. The centralized crypto lending space was hindered by wrong practices where collateral was taken in full marked-to-market to back loans – falling short of liquidity considerations and standard practices around collateral pricing and valuation. Illiquid collateral and wrong pricing led to a shortfall and insolvency domino effect, which reached an extreme during the FTX collapse.

We have seen a big uptick in crypto companies requesting our data specifically for valuation purposes. Bad data exacerbated 2022’s crypto crises, so it is heartening to see a better commitment to data in the industry ever since then.

(IS) The Kaiko Research Department has published several articles on liquidity – which we know is a critical topic in markets. What conclusions did you come to – after the FTX collapse last year and given the recent turbulence with banks and crypto exchanges as well? Has liquidity improved or changed in a systemic way over the past year or so?

(AS) A drop in liquidity was one of the biggest impacts of the FTX collapse. At Kaiko, we collect order book data for thousands of instruments trading on 100+ exchanges, which gives us a global view of the depth of market for all crypto assets. During the collapse, our research team observed this drop in liquidity in real time, which we dubbed “The Alameda Gap”, in reference to the absence of FTX’s market making arm, Alameda Research, and the exit of several prominent market makers from the industry. The Alameda Gap persists for most crypto markets.

The banking crisis also stressed liquidity because it led to the shutdown of some of the biggest fiat transfer networks used widely by traders.

The good news is that liquidity immediately around the mid-price has improved over the past few months for some of the largest assets. Liquidity further down the book remains thinner, but we could expect that as markets continue to recover and market makers migrate to new fiat banking solutions, there will be an improvement.

(IS) Citigroup published a report a little while ago highlighting the great potential for tokenization – up to $4 trillion by 2030. What does the data show on that? Do you at Kaiko already have ways to track new, tokenized assets coming “online”. And if not, how are you going to start jumping into that if tokenization really takes off?

(AS) Kaiko is actively monitoring the progress of tokenization and we regularly engage with numerous projects on this topic. We do not yet track this information, but hope to do so in the near future.

(IS) Tell us about how Kaiko got started. What was the spark for it all? What is your ultimate mission?

(AS) I have been personally interested and invested in crypto from 2013 onwards, and after about a decade in Investment Banking at HSBC in London, I left the trading floor for a tiny cupboard at WeWork, in order to focus full time on building out Kaiko.

I was driven by the fundamental conviction that blockchain would ultimately replace the backbone IT on which the capital markets industry runs. By the conviction that banks and financial institutions would eventually *use* blockchain to represent the ownership of traditional assets (equities, debt securities, real estate, luxury wines, etc. – what we today call RWA tokenization), and the transfer of such ownership, in a way that is much more transparent, auditable, and efficient.

And of course, by the conviction that data, and especially financial data, would play a key role in that future world of such a “digitally-native finance”.

(IS) You have quite some experience in the derivatives space, most recently at HSBC where you were before you got started with Kaiko in 2016. Do you think that derivatives and more complex financial products will also end up in tokenized form eventually?

(AS) Absolutely, I think we hear a lot about RWA (aka “Real World Assets”) tokenization these days, however most of the current flows in the financial markets, including derivatives and complex financial products, are cash-settled, therefore it is equally important, if not more important, to tokenize (or “smart-contractize”) the actual financial contracts to enable instant cross border cash settlement in a transparent and accurate fashion.

(IS) You were quoted in the Wall Street Journal some time ago, speaking about opportunities in Hong Kong and Asia. How do you see the global ecosystem developing? Is Hong Kong going to be a new (old) hub for digital assets – again?

(AS) I believe that the recent changes and initiatives from Hong Kong regulators toward digital assets will draw hedge funds and asset managers as well as more capital to the city.

Hong Kong has been proposing new initiatives for the city’s cryptocurrency and digital asset sector since last year, when it invited firms interested in providing securitized token services to pitch proposals.

In May, the Securities Futures Commission, or SFC, published rules for virtual asset trading platforms, including the requirement for crypto exchanges to apply for licenses that would allow retail investors to trade certain large-capitalization tokens.

Kaiko’s head of Asia-Pacific Sean Lawrence has relocated earlier this year from Singapore to Hong Kong.

(IS) While we’re talking about locations, what do things look like on the ground in France? It has gained some attention for its open regulatory regime and its vibrant community. Is that true?

(AS) Absolutely, there is a very dynamic tech and startup community in France now, driven both by a strong engineering culture and the prevalence of STEM careers in top tier business and engineering schools in France, and the fact that the VC landscape has significantly developed over the last decade, spurring the growth of a vibrant startup ecosystem. The French regulator (AMF) has been looking at the crypto/digital assets space for years now and has been taking steps in the right direction.

(IS) What other challenges do you think the digital assets industry is facing today? Are there any “under the radar” topics that are going unnoticed?

(AS) I think that now everyone understands how powerful blockchain technology is, there is not a single institution or large corporation in the world that doesn’t have a digital assets team today.

However, the blockchain ecosystem and its participants need to start seeing some actual industrial applications for blockchain technology beyond DeFi or POC-stage experiments, and I believe that we will see this happening over the next 18 months or so.

The problem is not a technology problem but an industrial governance issue when it comes to choosing a type of blockchain (public vs. permissioned vs. private etc.) and how to make these systems interoperable to enable actual industrial applications.