Why Deep Liquidity Is the Key to Institutional Investment in Blockchain

Ripple CTO David Schwarz is joined by Ripple colleague Breanne Madigan for the latest episode of Block Stars. Breanne—VP, Head of Global Institutional Markets at Ripple—is empowered by the growing institutional interest in blockchain and cryptocurrencies, despite the current Covid-19 climate.

In fact, she believes that the risk of soaring inflation that may result from ongoing government stimulus to stabilize and revive the post-pandemic economy makes decentralized digital assets more attractive to investors.

“You’ve got financial analysts now recommending [digital assets as] a hedge against central bank manipulated Fiat currency,” she notes. “Coinbase and Gemini got their accounts approved at JP Morgan Chase. [Hedge fund manager] Paul Tudor Jones announced that close to 2% of his [fund’s] assets are in Bitcoin. We’ve had a particularly momentous series of headlines that will drive institutional adoption.”

But Breanne acknowledges that true mainstream institutional adoption of digital assets will require greater liquidity. She outlines four primary attributes of liquidity, including tightness of the costs between buys and sells, resiliency to market shocks, breadth of trading instruments and order book depth.

Assets with deep liquidity “tend to trade with greater frequency and investors have an easier time getting over the hurdle of taking liquidity risk,” explains Breanne. Having a real use case improves liquidity significantly, as does increasing accessibility by creating more ways to trade the asset to support the use case.

The creation of enough new institutional-class products and instruments will require regulation on a global scale as the current lack of clarity and consistency is a threat to further innovation. But while Breanne believes more regulatory guidance will help the industry, it also requires flexibility.

“Flexibility will be key to account for the different products and also changing technologies,” she says. “We need clarity from [regulators] but then we don’t want it to be too prescriptive and specific that we stifle innovation. A number of global jurisdictions have started in a positive way to take the lead around setting frameworks. That’s been extremely helpful [but] we need a consistent approach across the globe.”

Global standards will not just help the industry, it will ensure countries that have been slow to legislate will not miss out on the benefits of blockchain.

“If the U.S. isn’t fast enough to develop constructive policy,” warns Breanne, “you may see…strong innovators and leaders in this space…set up their businesses in other jurisdictions.”

Listen to episode 5 of Block Stars now to hear more of Breanne’s thoughts on the future of institutional investment in digital assets, including why security token offerings may be the key entry point for traditional finance and whether we’ll eventually tokenize everything from real estate to racehorses.

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