• LMAX Group CEO David Mercer sees at least one major bank entering digital assets during 2021
  • Frictionless trade is the most important opportunity in financial infrastructure today

David Mercer sees a future where fixed income and currency desks trade bitcoin the same way they trade euros and dollars and even oil and gold today.

It could happen this year. The key is to get the banks on board — once that happens, he said, there’s no reason the partition between fiat and digital assets shouldn’t disappear.

“What’s missing is the banks with their customers – asset managers, corporate treasurers – but it’s slowly coming,” Mercer said. “The trickle will become a flood, though it may not all be this year, and it comes down to diversification.”

What happens when money flows from equities into digital assets?

Mercer is the CEO of LMAX Group, a 13-year-old financial technology company that operates institutional execution venues for foreign exchange, metals, indices, and digital assets. It operates five exchanges globally – three in London, one in New York and one in Tokyo – and trades about $25 billion every day, primarily in foreign exchange. 

With a $100 trillion in market cap in equities, it would take just a 5 percent allocation of that into bitcoin to increase the bitcoin market cap 5x from $1 trillion, Mercer said. That seems more realistic every day as old guard investors and institutions see the light in bitcoin.

Bill Miller, for example, a longtime bitcoin bull and private investor in it, recently implied in an SEC filing that the Miller Opportunity Trust is seeking exposure to bitcoin through the Grayscale Bitcoin Trust. Counterpoint Global, a $150 billion investing arm within Morgan Stanley, is currently assessing bitcoin as a suitable asset for its investors.

Plus, the U.S. debt to GDP ratio is about 127 percent as of late December and U.S. lawmakers are moving to finalize another stimulus package by the end of the month, this time for $1.9 trillion. Mercer said it makes “total sense” for asset managers, corporate treasurers to diversify 3 to 5 percent of their holdings into digital assets. Tesla became the poster child for this trend last week when it bought $1.5 billion in bitcoin – which Mercer said seems high at 10 percent of its balance sheet. LMAX Group has 5 percent of its balance sheet in bitcoin.

“It’s no longer a case of retail FOMO,” or fear of missing out, “it’s now a case quite simply of the weight of money that needs to be diversified,” he said.

Traditional money as we know it, however, is not on its way out or about to be replaced by digital assets — a narrative popular among crypto-evangelists but perhaps misleading, Mercer said. If anything, cryptocurrency businesses are reliant upon traditional institutions to create on-ramps to allow traditional currency to flow into digital assets.

On the need for banking and credit

In 2018 LMAX Group launched LMAX Digital, an institutional digital asset exchange. Last month it saw 114 percent month-over-month growth to $61 billion, including its biggest ever trading day of $3.8 billion (it averages $2 billion in trades per day). That demand is driven by proprietary trading firms, brokers and “boutiquey funds.” It’s connected to 34 banks today – including “all the major ones.”

Even with more institutional investors diversifying their portfolios, digital assets still need to move around and trade efficiently. That’s where LMAX Digital comes in, as a provider of market infrastructure for funds, banks, proprietary trading firms, brokerages and asset managers. 

It doesn’t do what a bank can do for the market, however. While digital assets are here to stay, Mercer said, banking and credit intermediation is just as important as adoption.

Mercer often advocates for the “ABCs of crypto”: adoption, banking and credit. In order to gain wider adoption, there needs to be banking and credit to fund trade and build companies.

“Vanguard or BlackRock, they don’t want to send a billion dollars to LMAX Group, they want to send it to one of their banks, and then they want one of those banks to store it,” he said. “Then you need better clearing – same thing: [they] don’t want to settle a transaction with 30 million customers on Coinbase. They want to settle it bank to bank or asset manager to asset manager.”

Frictionless trade is the most important opportunity in financial infrastructure today, Mercer said. With frictionless trade, access to the market can be much wider and more people can participate. 

Prime brokerages are already looking to beef up their operations to meet growing institutional demand for digital assets, by bundling their suite of offerings (and defending their fee structures). NYDIG, for example, plans to make several acquisitions this year that don’t necessarily have direct revenue streams but instead help service their clients better — which could include new technology for more efficient clearing and settlement.

“If you want to give $20,000 to your friend in Sydney, Australia, today your best bet is to go to the bank, get it out, jump on a plane and give it to them,” Mercer said. “If you send it via your bank it takes two days. That cannot be the case in 2021.”

What the future holds for digital assets

Better clearing and settlement isn’t just for trading bitcoin and ether today. The popularity of decentralized finance (DeFi) is on the rise, Mercer said. Today LMAX Digital lets members trade bitcoin, ether, litecoin, bitcoin cash and Ripple’s XRP against dollars, euros and yen. It doesn’t offer DeFi tokens yet, but Mercer said he’s a “big believer” in it.

DeFi is the movement towards digital financial instruments that don’t rely on centralized authorities like banks, but instead use smart contracts on blockchains (most commonly, the Ethereum blockchain). 

Many investors will buy bitcoin today because it has the most infrastructure around it, but smart contracts will revolutionize capital markets over the next decade, he said. Right now, however, “it’s a whole bunch of scientific experiments going on.”

“Everyone is buying tickets to the DeFi ball, but right now they’re at the doors with their tuxedos and ball dresses on going to the crypto ball,” Mercer said.

This year alone, BlackRock, the world’s largest asset manager, filed to include bitcoin futures among the derivatives that can be traded in two of its funds; BNY Mellon, the world’s largest custodian bank, revealed that it plans to offer custody of bitcoin and other digital assets this year; Visa said it’ll start helping banks offer bitcoin buying and selling to their customers; and even Mastercard vaguely embraced digital assets, saying it would bring some onto its network soon.

Mercer said he’s certain at least one bank will start trading digital assets too.

“I guarantee you,” he said “more than one major bank will be in the crypto marketplace before the end of 2021.”