This episode explores the accelerating convergence of traditional finance (TradFi) and digital assets, highlighting key structural changes and credit dynamics that will drive institutional adoption and reshape the future of crypto markets.
Institutional Tailwinds: From Headwinds to Adoption
- David Mercer, CEO of Elmax Group, provides an insider's perspective on the evolving landscape of institutional involvement in crypto. Elmax Group, a major player in global trading with $7 trillion in volume last year, is deeply focused on the future of digital asset marketplaces.
- Mercer emphasizes that the future marketplace is undeniably digital, projecting that digital assets will constitute 20-30% of all assets (around $30 trillion) by the end of the decade, and 80% by the end of the next.
- He acknowledges that institutional adoption isn't happening in "droves" yet, but significant preparations are underway.
- Mercer highlights two critical "C's": convergence (TradFi merging with digital assets and DeFi) and credit (the essential role of institutional-grade credit in unlocking massive capital inflows).
- "So, last year 2024 was a record year for Elmax Group across all our asset classes. But what you need to know is the only thing I think about, the only thing we discuss at an executive committee level, the only thing we discussed last week in Singapore at a board meeting was the future marketplace."
Market Structure Convergence: Crypto vs. Traditional Finance
- The discussion shifts to the differences in market structure between traditional finance and crypto, and what changes are needed to facilitate convergence. Traditional finance operates with a clear separation of functions: exchanges, custodians, and broker-dealers have distinct roles.
- Crypto's initial rapid development often overlooked these distinctions, leading to potential risks.
- Mercer stresses the importance of separation of function and segregation of funds as fundamental pillars for a mature crypto market structure.
- He clarifies that regulation's role is threefold: protecting consumers, creating a wholesale marketplace, and harnessing innovation.
- "Exchanges don't act as principle. Custodians are not exchanges. Okay. We have separation of function and segregation of funds."
Path Dependence and the Future of Crypto Market Structure
- The conversation addresses the "path dependence" of crypto's market structure, particularly the dominance of integrated entities like Binance and Coinbase. The question is raised: what will drive these entities to separate their functions?
- Mercer points out that despite perceived momentum, crypto's market cap hasn't overtaken gold, indicating room for significant growth.
- He suggests that the sheer size of untapped traditional financial assets ($197 trillion, excluding property) will incentivize change.
- Regulation will play a role, but the focus on a singular area of expertise (sales, technology, or liquidity provision) will also drive specialization.
- "You've got to go interplanetary. That's it. You're dealing on Mars. You're dealing on Mars. 97% is on Earth. You've got to straddle the two. That's why you might change."
Rebuilding the Credit Complex in Crypto
- The discussion turns to the critical role of credit in driving market cycles and the absence of a robust credit infrastructure in crypto today, compared to the pre-2022 era (e.g., Genesis, Celsius).
- Mercer emphasizes that the next wave of credit provision will come from institutions that understand credit risk, specifically tier-one bulge bracket banks.
- He envisions these banks providing leverage (e.g., 3:1) on digital assets, potentially multiplying the market cap significantly.
- This credit intermediation will unlock access for both retail investors (through platforms like E*Trade) and large asset managers (who manage trillions).
- "Jamie Diamond's not wrong when he says Bitcoin is a pet rock today. What do you do with it? I own a bunch. There's not much I could have done really if I'm honest in the last the last six weeks apart from lose money."
The Future of Digital Assets: Bitcoin, Ethereum, and Beyond
- The conversation explores the future composition of the digital asset market, considering the dominance of Bitcoin and Ethereum versus the potential for new assets.
- Mercer draws a parallel to foreign exchange, where a few currency pairs dominate trading volume.
- He acknowledges the existence of both promising and "rubbish" prototypes in the crypto space, similar to the early days of the internet.
- He highlights ongoing developments in Layer 2 solutions (Optimism, Solana) and oracles (Pith) as areas of improvement.
- The key driver, however, will be the fungeability of traditional assets into digital assets, enabling a seamless, 24/7 market.
- "But the big move honestly is going to be the fungeability of tradi assets into digital assets. That's 7 day a week seamless market."
Predictions for the Next Year: Institutional Milestones
- In the closing segment, Mercer offers specific predictions for institutional adoption within the next year:
- A Tier One Bank will begin clearing major institutions for spot crypto trading (not just ETFs or derivatives).
- A Bulge Bracket Bank will offer spot digital asset trading to its customers.
- He emphasizes that once these milestones occur, others will quickly follow, leading to a significant shift in the market landscape.
- "Look out for that. Then the graphs that Meltum shows next year will be vastly different and will look more like Nvidia and you'll understand we're just at the bottom of this current scurve."
Reflective and Strategic Conclusion
This discussion underscores the transformative potential of institutional-grade credit and market structure convergence in driving crypto's next growth phase. Investors and researchers should closely monitor the entry of major banks into spot crypto trading and credit provision, as these developments will likely trigger a significant influx of capital and reshape the market.
