In the wake of last year’s crypto winter and the

In a statement released on 1 February, HM Treasury noted that: “The crypto sector continues to experience high levels of volatility and a number of recent failures have exposed the structural vulnerability of some business models in the sector.” 

A tried-and tested approach 

The government has now laid out plans regulate a broad suite of crypto-asset activities, in a manner consistent with its approach to traditional finance.  

These proposals will place responsibility on crypto trading venues for defining the detailed content requirements for admission and disclosure documents – ensuring crypto exchanges have fair and robust standards. 

The government is also seekings to introduce new rules around financial intermediaries with regards to facilitating transactions, and custodians around the safe storage of customer assets. It hopes to create a “world-first regime” to strengthen the regulation of crypto-lending: a practice that contributed significantly not only to the downfall of FTX, but to the subsequent domino collapse of numerous other players in the crypto space that were tied into FTX and its sister company Alameda through a complex network of unsecured and often undeclared loans.  

Read More – FTX fallout: The contagion continues… 

The UK consultation will also seek views on improving market integrity and consumer protection, with plans to create a targeted crypto market abuse regime. 

Global fragmentation 

The move has been a long time coming. Regulation in the global crypto space is highly fragmented, with many leading finance markets (such as the UK, Europe and the US) still lagging behind when it comes to introducing and enforcing a coherent regulatory framework for digital assets. Others, such as Switzerland, the UAE, Singapore, Hong Kong and Japan have been more proactive on a regulatory level, while off-shore centres such as the Cayman Islands, Bermuda and Gibraltar have also attracted business by creating their own legal frameworks – meaning that much activity has been siphoned away from mainstream markets. 

The US, although it has made some progress (for example, with the release in March 2022 of its Executive Order outlining a government-wide approach to digital assets risk and regulation), has suffered from a fragmented approach, with its dual state and federal banking system often moving at different speeds, while Congress has been slow to make any final decisions and a comprehensive regulatory framework still looks to be some way off. 

Europe has got somewhat further – both France and Germany already have regulatory crypto frameworks in place, while the European Commission is currently in the advanced stages of finalising the EU-wide Markets in Crypto-Assets Regulation (MicA), originally proposed in 2020. The first cross-jurisdictional regulatory and supervisory framework for crypto-assets, MiCA is expected to come into force by 2024 and aims to ensure legal clarity, consumer and investor protection, market integrity and financial stability with a consistent approach across all member states.  

UK progress 

The UK’s previous approach to crypto regulation has been cautious – activity is currently not regulated by the Financial Conduct Authority (FCA), although providers can apply to register under its anti-money laundering and counter-terrorist financing regimes. The FCA has been highly reticent in approving applications, however – according to minutes from the a Treasury Committee meeting on 26 January, 85% of crypto firms applying for digital registration failed to meet the minimum standards. 

“We are in the middle of an inquiry into crypto regulation and these statistics have not disabused us of the impression that parts of this industry are a ‘Wild West’,” said Harriett Baldwin MP and chair of the Treasury Committee.  

Some market participants have complained that this heavy-handed approach has stifled innovation, although the FCA has hit back, pointing out that the majority of submissions are of poor quality, with only 5% progressing on the first attempt at 73% being withdrawn or failed – the most significant number ever seen when addressing a new remit.  

Some way to go 

Looking ahead, the latest proposals would seem to have been received as broadly positive. 

“We welcome the Treasury and FCA’s commitment to providing regulatory clarity for the digital asset space in the UK… It should help institutions gravitate towards the UK,” said Taylor Cable, managing director of Cowen Digital Europe, speaking to The TRADE.  

“It’s far and away the right move to approach it in a similar way to tradfi – the market has been begging for clarity.”  

However, those at the coalface are still cautious, and few are yet ready to put their money where their mouths are. According to the latest JP Morgan e-trading survey, released today, almost three quarters (72%) of traders surveyed have “no plans” to trade crypto, while just 15% expect to trade any digital assets within the next five years.  

Read More – Traders predict UK markets to have the worst inflation outlook for 2023, finds JP Morgan survey

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The US Federal Reserve, alongside the Federal Deposit Insurance Corporation 

“The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector,” said the agencies in a statement. “These events highlight a number of key risks associated with crypto-assets and crypto-asset sector participants that banking organisations should be aware of.” 

The regulators highlighted the risk of fraud, the susceptibility of stablecoins to run risk, contagion risk due to interconnections between crypto players, a lack of maturity and robustness with regards to risk management measures, and the absence of governance mechanisms to establish oversight of the sector.  

Legal uncertainties with regards to custody practices were also flagged, along with the risk of “inaccurate or misleading representations and disclosures by crypto-asset companies” and other practices that may be unfair, deceptive, or abusive, which the regulators warned could contribute to “significant harm to retail and institutional investors, customers, and counterparties”.  

The “significant volatility” within the crypto markets was also raised as a concern.  

The statement acts as a stark warning to those banks involved in digital assets – which include some of the biggest on Wall Street. The regulators stressed that they will be supervising any banking organisation that “may be exposed to risks” stemming from crypto as well as “carefully reviewing” any future proposals from banking organisations to engage in activities that involve crypto-assets.  

It is a clear (and long-awaited) sign that the authorities plan to more rigorously enforce risk controls around the crypto space – and it sends a strong message that, no matter what institutions may have hoped for in the past, the prospect that regulated entities might be able to hold or trade native assets on their own books is still a long way away.  

“Based on the agencies’ current understanding and experience to date, the agencies believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralised network, or similar system is highly likely to be inconsistent with safe and sound banking practices,” said the statement.  

The stance was announced on the same day that the US Attorney’s Office for the Southern District of New York (SDNY) launched a new FTX Task Force with the goal of reclaiming lost assets, according to CNBC reports. The task force will seek to trace and recover investor funds lost in the crash, estimated to be up to $8 billion (including $3.5 billion believed to be held by regulators in The Bahamas), as well as pursuing prosecutions related to FTX.  

“The Southern District of New York is working around the clock to respond to the implosion of FTX,” said Damian Williams, SDNY US Attorney. “It is an all-hands-on-deck moment. We are launching the SDNY FTX Task Force to ensure that this urgent work continues, powered by all of SDNY’s resources and expertise until justice is done.” 

Also on 3 January, FTX founder and former CEO Sam Bankman-Fried appeared in court pleading not guilty to federal charges of fraud. He was extradited to the US from the Bahamas to face charges just before Christmas. Former colleagues Caroline Ellison and Gary Wang earlier pleaded guilty to their own federal charges.

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Goldman Sachs

The tokenisation platform will be used to facilitate the issuance, registration, settlement and custody of digital assets, including but not limited to digital bonds. It is jurisdiction-agnostic and can be leveraged across global capital markets. 

Yesterday, the European Investment Bank (EIB), in collaboration with Goldman Sachs Bank Europe, Santander and Société Générale, launched Project Venus, its second euro-denominated digitally native bond issue and first using private blockchain technology. The €100 million, two-year bond was issued, recorded and settled on GS DAP, the bank’s first time using a private blockchain.  

Last April, EIB issued its first digital bond for €100 million on the public Ethereum blockchain, which was awarded a triple-A rating by Moody’s and Fitch and pushed Ethereum prices up to record highs and a market cap of over $312 billion.  

The latest private blockchain transaction paves the way for future on-chain derivative solutions, as it uses the first interest rate swap hedge represented through the industry developed common domain model (CDM).  

The new digital bond is also the first syndicated deal settled T+0 and the first cross-chain delivery vs payment (DVP) settlement using an experimental CBDC token, as well as the first digital bond to be executed under Luxembourg law.  

““With this new digital bond, EIB is again showing its leadership in capital markets, pushing innovation further by pricing the first syndicated digital bond on a private permissioned chain and settling T+0 across two blockchain networks, and we are excited to take part in this initiative alongside EIB, Banque de France and the Banque centrale du Luxembourg,” said Mathew McDermott, global head of digital assets at Goldman Sachs.  

“The transaction also marks the launch of Goldman Sachs’ proprietary Tokenisation Platform – GS DAP, which will… [pave] the way for market players to adopt blockchain technology.” 

The bond was settled through an experimental central bank digital currency (CBDC), developed jointly by the central banks of France and Luxembourg.  

Initial investors in the EIB bond include AXA IM and Union Investment. “As we continue to experiment with blockchain technology, we welcome the opportunity to invest in this new digital bond by the EIB, this time on a private permissioned network,” said Christoph Hock, head of multi-asset trading at Union Investment.  

“The innovative features of this issuance add another page to our learning journey as we expect this technology to be a major part of how capital markets transact in the future. Once again the strength of our internal teamwork, as well as the responsiveness and cooperation with DZ Bank as a depositary, the EIB and Goldman Sachs as platform operator were key in getting us over the line in time.”

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Singapore Exchange (SGX) subsidiary MaxxTrader, a single source and direct-to-market FX trading platform, has deepened the digital liquidity pool with the launch of MaxxDigital, a new digital asset trading solution. 

MaxxTrader’s first foray into the digital space, MaxxDigital offers OTC FX execution features for digital assets trading, as well as streaming, Request for Stream (RFS) and Request for Quote workflows. Users gain access to a deeper liquidity pool, ranging from OTC exchanges and market makers to electronic communication network (ECN) and exchanges offering listed crypto futures. 

They can also leverage native MaxxTrader algorithms for digital assets trading such as time-weighted average price (TWAP) and volume-weighted average price (VWAP), as well as basket trading algorithms for constructing and trading custom digital assets baskets and/or hedging exposure for exchange-traded funds (ETFs). Future plans include adding new algos to achieve best execution and reduce transaction costs. 

“There is currently a large gap in the digital assets trading market for a robust, functionality-rich trading solution and we believe that MaxxDigital can fill this critical gap,” said MaxxTrader CEO Manish Kedia.  

DBS, the largest bank in Southeast Asia with over $600 billion in assets, was the first institution to go live on the platform. “Partnering with MaxxTrader and leveraging their expertise enhances our digital asset trading offering and trading hours even over weekends without having to commit to additional backend resources,” said Jacky Tai, managing director, group head of trading and structuring, treasury and markets at DBS. “Our ability to streamline the end-to-end process efficiently enables us to explore the market’s full potential by providing even more dynamic pricing, financing, and risk solutions around the clock.”  

MaxxTrader, formerly owned by FlexTrade, was acquired by SGX in July last year for $125 million. Headquartered in Singapore, the firm has provided FX pricing and risk solutions for sell-side institutions including banks and broker-dealers, as well as a multi-dealer platform for hedge funds, since 2007. Its acquisition followed SGX’s previous acquisition of BidFX in 2020, a cloud-based provider of electronic FX trading solutions with a largely buy-side clientele, cementing the exchange’s ambitions to become a central Asian FX marketplace for global investors. 

“Since SGX expanded from FX futures to the global FX OTC market, we continue to cement our footprint in this fast-growing and sizeable US$6.6 trillion-a day global market. We are excited to acquire MaxxTrader, which further enhances our FX OTC offering and widens our customer base across the sell- and buy-side,” said SGX CEO Loh Boon Chye at the time of the deal.  

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Best Challenger Exchange is a new category for Leaders in Trading this year, in which we recognise not only the ever-changing facets of the marketplace but also the plethora of new venues springing up to accommodate them.

Unsurprisingly, given the themes of 2022, digital assets did a lot of the heavy lifting in this year’s shortlist – but it’s not all about crypto, with US-based players such as MEMX driving themes of equality and investor power, while IEX is of course well-known for its stance on high frequency trading. Our shortlist this year includes Archax, FTX, Investors Exchange (IEX), Members Exchange (MEMX) and Miami International Securities Exchange (MIAX).

Archax 

A new institutional-grade exchange for trading crypto/digital assets founded in 2018, Archax is the first crypto firm to be regulated by the FCA. With a majority stake acquired by abrdn in August 2022, the trading venue is clawing its way into institutional inner circles, most recently through its new partnership with METACO to deploy its digital asset custody and orchestration technology on IBM Cloud, in order to leverage the confidential computing capabilities of IBM’s digital asset infrastructure.  

A digital asset exchange, brokerage and custodian based in London, Archax has big ambitions. “We see the digital asset market as a long-term investment opportunity, and at Archax we make investments in technology and processes to reflect that vision,” says CEO and co-founder Graham Rodford.  

But it is also expanding outwards from pure crypto trading into the wider world of what blockchain can offer. In September, the firm partnered with BondEvalue to deliver solutions for the trading of fractional fixed income products. The partnership will enable their clients to access investment opportunities on BondEvalue’s regulated platform, the BondbloX Bond Exchange (BBX), a blockchain-based bond exchange which allows investors to conduct electronic trading of fractional bonds. 

As a bridge between the traditional and DLT space, Archax is proving a worthy contender.  

FTX  

A cryptocurrency exchange built “by traders, for traders,” FTX Trading offers products including derivatives, options, volatility products and leveraged tokens. With a senior team comprising alumnis from Jane Street, Optiver, Susquehanna, Facebook and Google, among others, the exchange seeks to service everyone from both professional firms to first-time investors, with a platform that is both simple and sophisticated.  

At the start of 2022, FTX Trading won a further $400 million in Series C funding, taking its total valuation to $32 billion – not bad for a firm only founded in May 2019, with investors including Singapore’s Temasek and Paradigm. In March of this year, the exchange expanded its presence into Europe and the Middle East with the establishment of FTX Europe, marking the next phase of its global expansion. Headquartered in Switzerland with an additional regional headquarter in Cyprus, the new company offers its products and services to European clients via a licensed investment firm with passportable licenses across the European economic area. 

In the same month, the firm partnered with US-based crypto platform West Realm Shires Services to launch a new unit targeted at institutional investors – marking its commitment towards developing and supporting institutional involvement in crypto trading. FTX Access will initially provide institutional investors interested in gaining exposure to digital assets with trade execution, analytics, index products, advisory services  and capital introductions, with plans to expand into custody, derivatives, structured products and other asset management products later down the line. 

“Our goal is to provide services that make it easier for traders at all levels to invest in cryptocurrencies, while also meeting compliance and regulatory standards found in traditional finance,” said FTX CEO and co-founder Sam Bankman-Fried, speaking at the time.  

FTX also this year made a strategic investment into IEX Group, the operator of the US-based Investors’ Exchange, in order to develop a transparent market structure for the buying, selling and trading of digital asset securities.  The question of crypto regulation has long been a tricky one, and FTX US has been clear about its ambitions to become a regulated exchange, working with regulators to create a platform that enables both retail and institutional engagement with digital assets.   

Investor’s Exchange (IEX) 

A controversial name on the exchange landscape, IEX has created some waves in recent years, but there is no question of its influence. Founded in 2012 with the intention of mitigating the impact of high frequency trading, and listing in 2017, the exchange is familiar to many as the brainchild of ex-RBC traders Brad Katsuyama and Ronan Ryan, who came to believe that that traditional stock exchanges were enabling certain trading strategies that could harm long-term investors such as mutual funds and pension funds. Debuting as a dark pool in 2013 and the subject of Michael Lewis’ notorious book Flash Boys, the exchange has since built a name for itself through its mission to give all market participants a fair and efficient trading experience.  

It has developed a number of innovations including the IEX Speed Bump, designed to ensure that the exchange executes trades at the most up-to-date price, and the IEX Signal (i.e., Crumbling Quote Indicator or CQI), a machine learning-based signal that aims to protect investors from trading while prices are unstable. Since its inception, more than $8.5 trillion in shares traded on IEX Exchange have benefited from the IEX Signal. 

Members Exchange (MEMX) 

Claiming to be the fastest-growing US equities exchange, MEMX was founded by its own members to serve as a co-operative, collective exchange acting in the interests of its founders and their client base. Its founding members include many of the largest US retail broker-dealers, global banks, financial services firms and global market makers, such as Bank of America Merrill Lynch, Charles Schwab, Citadel Securities, E*TRADE, Fidelity Investments, Morgan Stanley, TD Ameritrade, UBS and Virtu Financial. The exchange’s mission is to “increase competition, improve operational transparency, reduce fixed costs, and simplify the execution of equity trading,” and it has grown rapidly since its launch in 2020, currently accounting for around 5% of equity market share.  

Its big development this year was the launch of its US options exchange, and in August the SEC issued approval for it to trade listed options. “MEMX Options will use technological advancements to increase determinism, reduce costs and drive competitive improvements for our options members, just as we did in equities,” said Jonathan Kellner, chief executive of MEMX.  

“As the only exchange founded to represent the needs of market participants, expanding into a new asset class allows us to provide meaningful benefits to an even broader range of investors.” 

Miami International Securities Exchange (MIAX) 

MIAX operates regulated financial marketplaces across multiple asset classes and geographies. The MIAX Exchange marketplaces are enabled by in-house built, proprietary technology that was originally built to meet the high-performance quoting demands of the US options trading industry. 

The group operates markets across a number of asset classes including options, futures and cash equities: including options through MIAX Options, MIAX Pearl, and MIAX Emerald; US equities through MIAX Pearl Equities; US futures and options on futures through the Minneapolis Grain Exchange; and international listings through The Bermuda Stock Exchange. Through MGEX Clearing, it also offers clearing services for US futures and options on futures. The group recently acquired Dorman Trading, a full-service Futures Commission Merchant registered with the Commodity Futures Trading Commission.

Its total US multi-listed options market share reached a record 14.3% in 2021, a 21% increase from its 11.8% market share in 2020. Total US multi-listed options market share for the MIAX Exchange Group reached 11.63% in the first nine months of 2022, representing a 19.8% year-over-year decrease. A total of 97.3 million multi-listed options contracts were executed on the MIAX Exchange Group, representing an average daily volume of 4,635,039 contracts. Total year-to-date (YTD) volume reached 961.2 million contracts, a decrease of 2.8% from the same period in 2021.

In US equities, MIAX Pearl Equities reported volume of 2.8 billion shares in September 2022, representing a 101.8% increase YoY and a record monthly market share of 1.16%. Total YTD volume reached a record 22.4 billion shares, a 268.1% increase from the same period in 2021. Since launching its first options exchange in 2012, MIAX has grown to be the 15th largest global derivatives exchange operator as of 30 June 2022, as measured by the total number of futures and options contracts traded on exchanges as reported by the Futures Industry Association.

Since 2017, MIAX has been involved in ongoing litigation with Nasdaq, surrounding six claims of patent infringement. As of June 2022, these claims were invalidated by the US District Court and and Nasdaq waived its right to appeal, thus closing the case. 

The winner of Best Challenger Exchange will be announced at the Leaders in Trading 2022 gala awards dinner at The Savoy Hotel on 3 November. For table enquiries, please contact Nathan Anacleto.  

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The prime brokerage world from a traditional asset class perspective is well established – with a wide range of bells and whistles, its USP is its holistic approach, covering everything from custody to capital introduction, and assisting its client base to source liquidity they couldn’t find themselves. But in the digital assets space, what role can prime brokers really play – and is it realistic to try and shoehorn the current model into this new decentralised world? Panellists at Blockworks’ Digital Assets Summit (DAS) this week discussed the concept of prime brokerage, and how it can be updated to apply to the new paradigm.

“Not everyone with a lending service can call themselves a prime broker,” warned George Zarya, founder, CEO and head of sales at crypto prime broker BEQUANT. But the problem is that, unlike in traditional finance, prime brokers in the crypto space have not yet evolved to offer everything that their clients need.  

“In crypto, it seems that ‘prime’ and ‘brokerage’ are two different things. Brokerage is just people buying crypto off each other,” agreed Maja Vujinovic, managing director of blockchain advisory and investment firm OGroup. “But Prime is a whole bundle of services. It depends on the seat you’re sitting in.”  

So what is a crypto prime broker, and is anyone filling that role yet?  

“There are some firms out there that are doing some parts – the custody role, for example – but right now I don’t think we have yet reached the finished article,” said Edd Carlton, institutional digital asset trader with Flow Traders. “The use of the word ‘Prime’ is usually because it’s a one-stop shop. If you don’t do all the pieces, you aren’t hitting the target.”   

Fragmentation 

“The two key variables we need to place importance on, when discussing the difference between crypto and tradfi, is fragmentation and pre-funding,” stressed Omid Zadeh, head of business development EMEA at Matrixport.  

“The crypto market is so fragmented, there is liquidity across hundreds of different venues, and you need to pre-fund them, which is very different to the traditional space. Pre-funding and fragmentation of liquidity is where the real value proposition of a crypto prime broker comes in right now – we can offer access to each exchange, and top tier fees to each exchange, which is very important in this low volume environment. We can also give the key advantage of offering one margin to play with – cross-margining services can be key for firms.”  

The panel agreed, however, that while there are currently numerous players in the market, we are likely to see significant consolidation going forwards – the question being, who buys who.  

Acquisition 

“It’s not an easy feat, to build a crypto specialist firm, such as crypto custody – there’s a lot of coding and technical architecture involved. Those pieces will inevitably get acquired. You can’t have a one-stop prime shop without offering a complete parcel and there are only two routes to that – you build or you buy. The Goldman Sachs approach has been to buy it, and we’re already starting to see more big tradfi names aligning themselves with specialist firms, either through acquisitions, licensing agreements etc. One of the roles of a prime brokerage is to be a rock to stand steadfast in turbulent times, and in times like these, balance sheet is important.” 

Zarya, however, disagreed. “Balance sheet is important, but it’s not everything. It’s all optics. What happened to Credit Suisse? To Lehman Brothers?” 

Disruption 

The concern appears to be avoiding a simple copy and paste of what is being done in the traditional world of finance. “Early adopters went into crypto because they were passionate about decentralisation,” stressed Vujinovic. “Now, we’re just trying to cram that back into a centralised model again. But I think technology is going to evolve to a point where it disrupts that. Yes the tools, the picks and shovels at the coal face, are being acquired by bigger institutions. But banks will end up just being software-as-a-service platforms. They’ll offload crypto custody, just like they do KYC. We’re in a place now where we have to change it up, think outside the box and create a different system that works better – not just do the same old thing, just because Goldman Sachs are doing it.” 

Carlton, however, pointed out that acquisitions could also work the other way – with big crypto firms buying smaller banks in order to bring in regulated capabilities.  

Centralisation 

“We need to get capital into the crypto markets, and the way to do that is by creating a market infrastructure model that replicates the prime model, with centralisation of clearing and risk, but with the nuance of a hybrid model using DLT and smart contract applications. That’s the way we’ll see the tide move,” he said. “Would a full belt and braces prime brokerage in the crypto market help right now? Yes. Would it increase investor confidence and make the market more efficient? Yes. I think that prime brokerage services have a key role to play in moving this forward.” 

The biggest issue in the space, however, remains the problem of pre-funding. Right now, most of the liquidity in the crypto space is on centralised exchanges, and these require pre-funding, which all the panellists agreed was not efficient.  

In addition: “The netting side of things doesn’t exist yet in crypto, and that needs to change,” pointed out Zadeh. “For example, let’s say you have two exchanges: Binance and FTX. If you’re Hedge Fund A trading $100 million on Binance long, and $100 million on FTX short, if you had a prime broker in between, he would require minimal margin from you. Whereas currently in the crypto space, it’s different, because of pre-funding. You would have to have $200 million at both exchanges. Obviously, you’d have a prime broker in between leveraging you, but that funding would be on those exchanges.

“The only way I can see that potentially changing in the future is regulation as the first step; then after regulation the real money clients will come in, the banks will then come in, and then a big player – a Citibank or a JP Morgan, with a ginormous balance sheet that dwarfs the exchanges, that could PB, and net across all of the exchanges, and then all of the institutional counterparties (the big real money clients that have trillions under management) can really start to trade crypto full pelt.” 

But will institutional traders ever come in at full pelt? 

“We have certainly seen a shift with institutional traders coming into the space, but we still run on retail rails,” said Zarya.  

Evolution 

The move, for institutional involvement, is likely to be accompanied by a shift from on-exchange to OTC trading – similar to the trajectory in the FX markets a few years back. “Electronification, going from hi-touch voice-driven trading to an API, FIX-driven market – we are seeing the same trends apply,” agreed Carlton.  

“Retail flow lends itself to exchanges, but institutional flow sits a lot more happily on the OTC markets. When the barriers are removed to allow true institutions to enter the market, I’m not saying the exchanges will become defunct, but they will probably continue to service retail clients while institutional flow will direct more to the OTC space.” 

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Toby Norfolk-Thompson, Matrixport

First things first – for those who don’t know, who are you and what do you do?  

Norfolk-Thompson: Matrixport is a full-service digital assets prime broker, which was spun out of BitMain (the world’s largest Bitcoin mining hardware manufacturer) in 2018 by founder Jihan Wu, and reached unicorn status in August 2021. Now we’re looking to drive forward our institutional prime financing and collateralised lending activities, and to support our hedge fund and family office clients. As well as prime financing we also invest in funds directly, we have a fund accelerator program, and we’ve been building out that function in the UK and the US recently. 

How do you see the institutional crypto space developing, in terms of both the attitudes and the access of institutional investors towards digital assets?  

Zadeh: What we’re finding is more and more names and more partnership deals coming into frame. That’s creating a sense of FOMO at C suite-level – when other asset managers are seeing BlackRock do a deal with Coinbase, for example, that spurs on a lot of activity with C-level saying OK, we need to be getting involved with that asset class as well. We’re now seeing that FOMO trickle down, so more and more asset managers are starting to strike deals. Just a few days ago we saw BNY Mellon launch a new digital asset custody offering, which will spur on a lot of their clients, out of a very large customer base, to look more closely at digital assets. We’re seeing a high level of hiring of new heads of digital assets at asset managers, trying to get in on this game.  

In terms of actually getting down into real nitty gritty of trading these things? That’s probably going to be 2023/24 phenomenon.

In terms of actually getting down into real nitty gritty of trading these things? That’s probably going to be a 2023/24 phenomenon. But the fact that those wheels are now turning, those hires are now being made, suggests that it’s definitely on the way and there are clear strategies for digital assets to generate revenues, it’s being placed into the three-year plans of pension funds and asset managers already. On the hedge fund side, pretty much every hedge fund in the top 50 is now either trading in crypto, or looking at coming into crypto pretty quickly and setting lines up within the space.  

When you say we won’t see trading till 2023/24, is it that the infrastructure is there but the appetite is not, or is it the other way around? 

Zadeh: A bit of both. The infrastructure that pension funds and hedge funds require is very complex, and that is half there now, and more is coming. The appetite is definitely there to get there, to start trading, but there are a lot of regulatory hurdles. For pension funds that are more risk averse, that’s what is holding them back. But they are getting there, they are preparing the decks, I think most have accepted that crypto is going to be a critical component of their trading desks in the future, they’re just getting ready for when we get the all-clear from regulators. 

We’re also seeing banks opening up desks, and once the banks start doing that, we’ll definitely start seeing a bigger trickle-through into the buy-side.  

Will we ever see banks prop trade crypto? 

Zadeh: I think that might be quite a lot further down the line! 

Norfolk-Thompson: It’s all about capital liquidity rules. It’s impossible for banks right now to hold digital assets on their balance sheets at the moment because of crypto capital rules. Therefore they are having to interact either by setting up new divisions to hold digital assets, which is what Nomura is doing with Laser Digital, and what BNY Mellon are doing with their custody services. Those capital rules will develop – the UK and Switzerland are probably leading the race on that one though, the picture is more complicated in the US. 

Another point is that when you’re talking to the BlackRocks of this world, most of the larger institutions have at least a 12-18 month approval cycle. So they’ll have kicked off with a small sandbox where they let people play around with a few million dollars first, and now those cycles are starting to come to fruition, and we will see more people coming into the market in a more serious way. 

What are players like Matrixport doing to support that? 

Norfolk-Thompson: We are trying to support more active and fixed income focused traders come into the market. We’ve built out our research function, we’ve made new hires, and we’re putting out a weekly research piece focused on the things that active fixed income traders need – yield opportunities, volumes, what is executable, and what the underlying revenues of the system look like. It’s all moving along, but what’s urgently needed in the market right now is education.  

What does the liquidity profile look like, and why is there still so much reticence from the buy-side?  

Zadeh: The buy-side have different mandates, and these only allow them to deal in certain areas, so they’re restricted in terms of what they can go into. What we’re seeing right now is that a lot of the pension funds and hedge funds, even though they’re interested, aren’t actually the key players in this space. A lot of the volume is not being generated by the traditional names, but by the crypto native, digital native names. They’re becoming the big names, and the heavy hitters – very different to the traditional markets. It’s a new type of name that many firm wouldn’t even know if, if they don’t know this space. These guys are very nimble, very sophisticated, and they have access to capital at a very low level. They can build very complex algorithms to trade across – the market is so fragmented, and there are so many exchanges that they can find opportunities on. It’s these really nimble firms that can move really quickly when they see an opportunity, and get that accepted to trade really quickly, that are generating the most alpha and delivering the best returns. These are the firms we think will remain strong going forward.  

But once the big high frequency trading guys, the Chicago and US-based guys who haven’t yet fully committed, once those guys enter the market, they have access to the fastest and best technology, and the most capital, so how much of the market will be made more efficient once these guys start coming in and cleaning up these market inefficiencies? I wonder how many of these digital-native firms will be pushed out, once that happens. The discussions I’ve been having with the biggest digital-native players, they feel that the systems and the apps that they have built over the last four to five years are so strong that it will take a long time for anyone else to catch up if they’re starting from scratch. A lot of the market right now is systematic and API-driven – manual traders, point and click, macro crypto hedge fund traders are few and far between. It’s a systematic, API, blackbox game right now, with coders in the driving seat.  

Norfolk-Thompson: There is more liquidity out there than people think. There are a number of very specialist players with very deep pockets, who are happy to take a lot of risk in order to provide that liquidity.  

What’s on the cards for the rest of the year? 

Zadeh: One thing on the roadmap for us that is very close to fruition, based on our institutional focus, is a move to bring the institutional tools that traders are used to from the traditional world, into the crypto world. First and foremost, this will start with trade ideas. Hedge funds are very used to having a trade ideas person at every bank or broker, so they’re constantly being fed trade ideas, told where there is an opportunity, built out from research, and every morning sales guys at banks and brokers are shooting that out to everyone. This is something we’re now about to launch ourselves, providing trade ideas to clients – not saying “we’re a broker, use us for lending and execution services” but just adding colour and value to the space. That hasn’t happened in digital assets yet, and we’re looking to translate that over from the traditional market into the space for the first time.  

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The European Union has approved the legal text for its landmark Markets in Crypto Asset Regulation (MiCA), marking a significant step in the journey towards a fully authorised and regulated crypto-asset market in Europe. 

The European Parliament’s Committee on Economic and Monetary Affairs will now vote to pass the final text on 10 October, before a date is decided for the implementation of the regulation. 

The EU said that the lack of an overall regulatory framework for crypto-assets “can lead to a lack of users’ confidence in those assets”, restricting the development of the market and could potentially lead to “missed opportunities in terms of innovative digital services, alternative payment instruments or new funding sources for Union companies”. 

As a result, the EU concluded that it was necessary to establish specific rules for crypto-assets, with a view to support innovation and fair competition, while ensuring protection for participants and wider market integrity around the new asset type.  

“Capital requirements are to be introduced for providers, with the amount dependant on the size and nature of the service provided.” 

The proposed rules lay out provisions on supervision, consumer protection and environmental safeguards for crypto-assets, outlining rules for those issuing, safeguarding and trading the new asset type. Capital requirements are to be introduced for providers, with the amount dependant on the size and nature of the service provided.  

“It is important to ensure that the Union’s financial services legislation is fit for the digital age, and contributes to a future-ready economy that works for the people, including by enabling the use of innovative technologies,” the EU said in the regulation. “The Union has a stated and confirmed policy interest in developing and promoting the uptake of transformative technologies in the financial sector, including distributed ledger technology (DLT).” 

MiCA also sets out guidelines for crypto-asset service providers, covering custodial and administrative services. The rules establish a best-practice framework, detailing rules around fees, communication and security.  

Speaking in June after the provisional text was drawn up, Stefan Berger, the lead MEP on the project, labelled the regulation a European success. “We are the first continent to have a crypto-asset regulation. In the Wild West of the crypto-world, MiCA will be a global standard setter. MiCA will ensure a harmonised market, provide legal certainty for crypto-asset issuers, guarantee a level playing field for service providers and ensure high standards for costumer protection.” 

The full text is available to read here.  

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Crypto is big news – and while it’s not all that everyone’s talking about at TradeTech FX, there’s definitely a buzz around digital assets that’s impossible to ignore. Not everyone is on the same page with regards to adoption rate – some feel institutions are being left behind, while others advocate caution until we see which way the wind is blowing. But after the crypto winter we saw in recent months, one thing seems for certain – the sun is once again coming out. The industry consensus is that crypto is here to stay, and if you’re not yet on board, you might have missed the boat.

“There will be a new crypto summer, and everyone should be getting ready for that.” 

Mercer believes there is no doubt that crypto assets will eventually pervade traditional assets – the only question is how long it will take. “The two things holding it back are the lack of regulatory determinism, and the lack of conventional credit mechanisms,” he said.  

But the growth of the asset class is undeniable. “This year we expect our activity to be around 80/20 FX to crypto, which is about where it should be. But don’t forget that the eighth biggest currency pair last year was BTC/USD. It’s already a traded asset class. You can trade Bitcoin against most other assets on the Street already – and in five years from now we’ll be trading against even more – from BTC/S&P, BTC/gold, and much more.”  

However, there are still some barriers to institutional adoption.  

“In traditional finance you have an ecosystem, you have traditional customers, bank intermediaries, brokers, exchanges, prime brokers, custodians,” explained Mercer. “Not all of that exists yet in the conventional space.”  

Elodie de Marchi, head of operations and corporate strategy at digital assets data provider Kaiko, agrees. In a panel discussing ‘Crypto for institutions: how will the new crypto wave impact FX markets and what are the barriers that need to be overcome to ensure mainstream institutional adoption,’ she stressed that: “We urgently need to see more maturity in the infrastructure space. We also need to improve access to data and education. If you don’t have high quality data, you simply can’t operate.  

“We urgently need to see more maturity in the infrastructure space. We also need to improve access to data and education.

“Crypto is a highly fragmented system – you have centralised exchanges like Coinbase, alongside decentralised ones like Uniswap – and these are now seeing around 50/50 in terms of activity. Only looking at centralised exchanges is like only looking at the tip of the iceberg. You need data for rebalancing, for risk management – and you need specific solutions for crypto. We do see institutional adoption, but big banks and largescale projects really need better infrastructure and better data to really drive real adoption.”  

Panellists also emphasised the need to learn from what’s been done in the traditional finance sectors in order to see a convergence.  

“We need to look at how can we take the benefits of traditional finance and overlay that into the innovation occurring in the crypto space. For example, there was probably an over-extension of credit in the crypto space in the summer, and we could perhaps benefit from the checks and balances of traditional finance,” said Nicola White, CEO of digital asset liquidity provider B2C2.  

“There was probably an over-extension of credit in the crypto space in the summer, and we could perhaps benefit from the checks and balances of traditional finance.”

“Crypto exploded spectacularly this year, creating a messy credit event,” agreed Edd Carlton, institutional digital asset trader at Flow Traders. “It highlighted the importance of counterparty risk – who is on the other end of your trade? We work to create what I call the path of least resistance –we try to make the pre- and post-trade set up as similar as possible to what people are used to.”  

One thing is for certain – the market is rapidly evolving, and the pace of growth is by no means slowing. “Eight years ago, crypto trading was very hi-touch, very voice-driven, based around RFQs,” explained Carlton. “Now, I’d say 90% is done electronically. The evolution in terms of market structure has been very rapid – in fact, it’s been a carbon copy of the evolution in the FX space, just over a much shorter time span.” 

Everything is now moving forward – and new issues are coming to the fore. “We’re also focusing right now on what crypto can bring to the traditional finance space,” said White. “For example, settlement. In traditional finance you’re looking at a day, maybe two, before you exchange on the back of a trade. In crypto, we settle 70% of trades within 15 minutes and 99% within 45 minutes. If you think of the events in June this year, you’re substantially reducing that credit risk in a very short period of time.” 

Luke Brereton, senior VP at State Street Global Advisors, went further: “We need to get rid of settlement risk – it’s not fit for purpose for the crypto market. It traditionally consumes a huge amount of capital because of intra-day cost of funding. We want to achieve atomic settlement at the point of trade. That’s what we need in order to achieve institutional involvement.”  

“We want to achieve atomic settlement at the point of trade. That’s what we need in order to achieve institutional involvement.”

Another option is to extend outwards from crypto and flip technology back to the more classic analogue asset classes. For example, last year State Street Global Advisors did an FX forward, traded on the blockchain as a smart contract – with micro processes embedded in the contract enabling them to review it automatically every few minutes. “Here’s a way of using blockchain to take on traditional markets and make them more efficient,” stressed Brereton. “That’s the way that we’re going to see broad institutional adoption of this trend – not just by trading crypto, which realistically is just another risky asset class.”  

But when it does come to trading institutional crypto, where next?  

“Now that we’ve moved through the credit issue, the trend is in execution,” predicted White. “We’re bringing algos into the crypto space – how do I vwap, how do I twap?”  

“We starting to talk about issues like liquidity management, pricing, latency, cross-connects,” added Carlton. “These conversations are bread and butter in the FX world, and they’re now starting to happen in crypto as well.”  

Another trend is, unsurprisingly, derivatives – particularly crypto futures, and perhaps it is here that the true potential lies.  

“Treasury groups in June were sitting on massive positions in Bitcoin, in Ether, and hadn’t hedged it – they hadn’t thought about the chance that the asset class would go down,” noted White. “Now, the conversations are all about options, about hedging. There are more and more institutions finding themselves involved.” 

“It’s going to be interesting to see the derivatives space grow, and whether it grows faster than spot,” agreed de Marchi.   

For now, the mood is one of cautious optimism.  

“We believe crypto adds value to a portfolio, but there are reasons to take it with a pinch of salt,” said Sven Schubert, head of FX strategy at Vontobel Asset Management. “The added value will change over time, just as it did for gold once the gold standard changed. In five to 10 years, we will have a very different perspective as to whether it adds value to a portfolio or not.” 

But don’t get too excited, there’s still some way to go.  

“Participating in a crypto risk trade is not a top priority for most of our clients right now,” admitted Brereton. “There are people looking at it, they’re interested, it has potential, but it’s not happening quite yet.” 

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Thomas Restout

Morgan Stanley’s global head of macro electronic trading, Thomas Restout, this week joined digital asset liquidity provider B2C2 as its new CEO of EMEA, the latest senior executive to join the crypto exodus.  

Restout, who will report to B2C2 group CEO Phillip Gillespie, has long experience in the digital asset space, including as a member of Morgan Stanley’s Securities Digital Currencies working group and as the driving force behind the adoption of crypto trading within the bank’s fixed income division. He was previously at Goldman Sachs and began his career at Natixis. 

“The tremendous growth of crypto assets during recent years shows its acceptance as an established asset class, attracting a growing range of institutional participants. B2C2 is a highly successful and strategic innovator in this market. I am excited to be joining the team to help accelerate expansion by widening the offering further, through leveraging technology and quantitative approaches,” said Restout. 

“Institutional interest in cryptocurrencies is spurring more TradFi participants into committing significant resources towards the understanding, productisation and commercialisation of digital markets,” added Gillespie. “B2C2 has grown to become one of the leaders driving this convergence. Our appointment of Thomas adds additional and complementary market knowledge, as well as risk management and product innovation expertise to B2C2. I am thrilled to welcome Thomas to B2C2.” 

In other news, Wells Fargo also recently lost its head of electronic sales and trading, Peter Eliades, who departed in August to join crypto prime brokerage Floating Point Group as global head of distribution. Eliades, who also held the role of head of Americas trading for JP Morgan for over 10 years between 2008-18, will be responsible for sales and business development in the US and APAC, reporting to co-founder Kevin March. 

“Peter has built world-class electronic trading businesses for decades and understands the role that crypto will play in shaping the future of global financial systems. Bringing Peter on is a ground-breaking moment for our team, as we continue to see demand for best-in-class institutional offerings from our clients and potential participants,” said John Peurifoy, co-founder and CEO at Floating Point.  

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