The crypto market has faced liquidity challenges due to the lack of a crypto bank settlement layer, as highlighted by Ram Ahluwalia, the CEO of PeerNova. Unlike traditional finance, where clearinghouse firms such as the Depository Trust and Clearing Corporation (DTCC), Chicago Mercantile Exchange (CME), and Intercontinental Exchange (ICE) act as intermediaries between buyers and sellers, the crypto market lacks a similar clearinghouse infrastructure. As a result, market makers and other participants are forced to assume counterparty and settlement risk without a centralized clearinghouse, which can be a significant barrier to trading. This has led to a drying up of liquidity in the market, making it more difficult for traders to find counterparties and execute trades.
To address this challenge, Ahluwalia has emphasized the growing need for a crypto bank settlement layer that can provide the same security and confidence as traditional clearinghouses. This would allow market makers to settle instantly with counterparties without taking on any counterparty or settlement risk. It would also help improve market stability and facilitate efficient trading, which would benefit the crypto market as a whole.
The emergence of solutions such as Signature Bank’s Signet, a blockchain-based system and a competitor to Silvergate Capital Corp’s now-defunct SEN, has seemingly solved this problem for the crypto market. These solutions provide market makers with instant settlement, allowing them to trade with counterparties without having to tie up capital on multiple exchanges or wait for funds to clear, which is crucial for improving capital efficiency. The lack of it can lead to a drying up of liquidity in the market.
However, Ahluwalia raises an interesting question regarding using a secure high Transaction Per Second (TPS) blockchain to settle transactions instead of the banking settlement layer. While decentralization has grown in popularity, Ahluwalia believes that certain risks are associated with relying solely on blockchain technology for settlement. One major issue is compliance with sanctions screening laws issued by organizations like the Office of Foreign Assets Control (OFAC), a division of the US Treasury. This list includes North Korea, drug cartels, Russian oligarchs, and Iran. Market makers were previously able to rely on banks to ensure compliance with these laws, but without this layer of oversight, market makers would be assuming more risk.
Overall, in the context of a 24×7 crypto market, the need for a 24×7 bank instant settlement layer is critical to unlocking liquidity, and the recent loss of critical market infrastructure like SEN and SigNet has highlighted the importance of having a reliable settlement layer in place. With the increasing demand and growth of the crypto market, it is essential to have a robust infrastructure that ensures market stability and facilitates efficient trading. As such, the crypto market needs to explore and develop various solutions, including a crypto bank settlement layer, to overcome the liquidity challenges and realize its full potential.
