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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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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New York-based Finansiv has become the latest crypto prime brokerage to enter the institutional space, launching its infrastructure and execution services for clients this week.

The provider claims to be the first digital asset prime brokerage offering services to both retail as well as institutional investors, with the retail platform expected to go live by the end of the year.   

Scaling up 

The institutional element, which is already offering live OTC trades, provides an end-to-end platform for clients with a single touch point. It offers a full brokerage service including execution and capital management, one-step settlement, integrated custody, and post-trade reporting.  

Its trading platform allows investors to connect directly to exchanges and crypto markets, while its OTC desk is designed to help investors place large block trades without engaging with a specific user interface, using smart-order-routing technology to find the best execution for each order. .  

“Cryptocurrency trading lacks the transparency and liquidity that is nowadays the standard in traditional finance,” said Finansiv founder and CEO Aleksandar Ivanov.  

“Investors are seeking a better way to execute large trades. We’ve built a client-first company that leverages best-in-class technology tools and multiple liquidity sources to help clients plan trades and receive best execution.” 

Adding to the market 

The launch underlines a surge of activity in the institutional space for crypto trading. Earlier this month, London-based crypto lender Nexo launched its own proprietary prime brokerage platform for institutional, corporate and high-net-worth clients. Known as Nexo Prime, the service allows investors to trade, borrow, lend, and store their digital assets in a single product, along with advanced custody provision. The platform was incubated over the last 18 months with a core client base, and has now been released to the wider market.  

“Institutional and corporate demand for digital assets has never been greater, and the market for prime services could 10x over the next year,” said Kalin Metodiev, Nexo co-founder and managing partner.  

Coinbase ambitions 

Coinbase, one of the world’s largest publicly-listed players in the crypto space, is also rumoured to be planning big things in this arena, and recently hired a consultant (Wytrwal Industries) to explore expanding its infrastructure for institutional clients. It already provides a service through Coinbase Prime, an integrated solution providing secure custody, a trading platform and prime services that was first launched back in September 2021 with over 9,000 clients already enlisted (including Tesla, Anheuser-Busch and Franklin Templeton, among others).   

In Q4 last year, institutional trading volumes on the platform reached $371bn, an increase of 59% compared to Q3, and accounting for 68% of total trading volume. By comparison, back in Q4 2020 institutional volumes on the platform were just $57bn, meaning that volumes have jumped by over 550% in just two years. Over 2021 the firm grew its institutional customer base by over 50%, including doubling the number of custody customers, according to a shareholder letter.

Bearish banks 

But not everyone is on board, with some players still expressing reservations. Earlier this month Michael Moro, CEO of prime crypto brokerage Genesis Global Trading, warned that while institutional and individual investment might be on the rise, banks themselves were still “very far away” from trading crypto.  

Speaking at the Bitcoin 2022 conference in Miami he noted that bearish sentiment from regulators was one of the key factors inhibiting involvement from financial institutions. 

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With current crypto values exceeding $2 trillion, the market for digital assets is surging and institutional interest is rapidly increasing. A new report from PwC, in partnership with the Alternative Investment Management Association (AIMA) and Finery Markets – which bills itself as the first global crypto-native multi-dealer platform – suggests that we could finally be seeing the first evidence of mainstream institutional adoption.

However, with numerous different digital assets to choose from and (according to Coin Market Cap) over 300 exchange platforms to trade through as of January 2022, the key question is where – given the sophisticated requirements of institutional market participants – is best to execute your trades.   

“A client’s choice of digital asset execution venue may be influenced by the offering and acceptance of fiat and cryptocurrency, the reputation of the exchange in an already polarised market, and the costs associated with the transaction and the market prices that are achieved,” said PwC.  

Centralised exchanges (CEXs) such as Binance (the most popular centralised execution venue among the 77 buy-side participants surveyed), Kraken and Coinbase are strong favourites, due in large part to the security and liquidity they offer, the report noted.  An overwhelming majority of trading (more than 90% of participants, according to PwC) currently occurs via CEXs, which leads to lower liquidity risks and narrows the bid-ask spread for a more accessible market, but there are also downsides, including potential for hacking attacks and the perception that they are often not built to handle the scale of large transactions that institutional players are looking for 

Decentralised exchanges (DEXs) are another option. These mitigate the hacking issue because they don’t exist on an exchange, so from a security perspective, the exchange of digital assets is less prone to an attack. However, a notable drawback of decentralised exchanges is their lower liquidity and the risk of market manipulation. 

“The keywords here are miners extracting value, front runners and automated market-makers. In a nutshell, fluctuations in prices and execution times in the digital asset landscape allow the validators of blockchains to interfere with the orders that are made public,” explained the report.  

There is also a risk that large-volume DEX orders could also face hacks, while another concern is that the emphasis on privacy and lack of transparency could make essential due diligence impossible. Around a third of participants currently trade on DEXs, according to the report, with the most frequently used platforms being Uniswap, SushiSwap and 1inch. 

OTC venues are emerging as an increasingly popular alternative, as they allow investors to trade high volumes at a pre-agreed price. However, they are less efficient than exchanges – when a party submits an order, they need to wait for a counterparty to engage, which can delay execution, while the lack of a delivery versus payment mechanism means there is a risk of a party defaulting. Among the institutionals that trade with OTC desks (which accounted for around half the survey participants), the most popular counterparty is B2C2, followed by Cumberland, Genesis Trading, Galaxy digital, BlockFills and DV Chain.  

Finally, smart order routing (SOR) is also gaining traction among institutional investors, using an algorithm to determine the best price for the transaction. Through a pre-determined scope of trading venues, the SOR seeks to achieve the most favourable trading condition. The method is appealing in terms of best execution because it can access several trading venues simultaneously. This means the range of digital assets traded is broader, and liquidity can be aggregated – a distinct advantage in such a fragmented landscape. However, the method is highly complex which limits take-up even among institutional players.  

“When choosing an exchange, the respondents seem to place importance on execution and liquidity quality,” said the report. “The second most important factor is the assets an exchange supports. Rounding off the top three, regulation and jurisdiction reputation is the final factor in the choice of exchange.” 

Interestingly, fees and commissions came in fourth place, suggesting that players are currently willing to pay more in transaction fees if the exchange has other features they want, such as a wide range of assets, best execution capabilities, and legal certainty.  

In summary, institutional trading of digital assets is still in its early days and the market has yet to consolidate into any identifiable trend or preference. Almost all institutional investors use more than one platform to trade, with at least 25% using more than 10 venues. But consolidation could start to appear as volumes increase – similar to the FX market, which also used to be highly fragmented.  

And the outlook is promising. The report found that almost 70% of the companies that have traditionally traded in financial instruments are now engaging in trade in the digital asset landscape, marking a positive long-term trend. “This shift of traditional finance companies making the transition into digital assets could be the start of mainstream adoption of digital asset by financial institutions,” noted PwC.  

Volumes are still low – the highest number of respondents trade less than $10 million a month in digital assets. But these too are growing. “Even though there are a greater number of companies that trade less volume, the volumes of institutionals that trade more than $10 million are much greater in total,” found the survey. “A bullish market may lead to more institutional entries to the market and may increase the volumes traded in the future. 

With over 60% of participants already looking to improve their current trading setup for digital assets, the market may not yet be fully mature – but it’s certainly moving in the right direction.  

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Martin C. Grant

As the question of crypto regulation gathers momentum, digital assets specialist JST Capital has confirmed the appointment of Martin C. Grant as its new global head of regulatory affairs and integrity, responsible for navigating the evolving digital asset regulatory environment to ensure best practices and hold discussions with global regulators as they work to adopt new policies to regulate this unique marketplace.  

Additionally, he will act as a resource for JST’s global client base to help them understand the intricate nature of regulations in order to make informed investment decisions. 

Grant joins JST from the Federal Reserve Bank of New York, where he held the role of senior vice president and chief compliance and ethics officer for over 15 years, responsible for building and leading the bank’s internal compliance efforts. Grant has also worked with other state and federal regulators as well as government agencies to harmonise compliance policies within Federal Reserve Banks and financial institutions around the globe, and has provided technical assistance and guidance to central banks around the globe on compliance policies and practices.  

Formerly a lawyer in the New York Fed’s enforcement and litigation division, Grant is also the chair of the Conference Board’s Global Business Conduct Council and a member of the Compliance Committee of the Association of the Bar of the City of New York.  

“Throughout 2021, JST has continued to expand in order to meet growing institutional demand. We increased our headcount, tripled the number of clients and saw a 10-fold increase in gross revenue,” commented Scott Freeman, co-founder and partner at JST Capital. “By bringing in Martin, who has over 30 years of experience operating in the regulatory and compliance space, JST is doubling down on its mission to not only offer clients unmatched financial services in the crypto sector, but to also assist in navigating the regulatory environment. We are excited to welcome Martin to the team and work alongside him to engage with regulators around the globe.” 

Grant is the latest senior executive to move into the digital assets arena, a trend that has been notable on both the industry and regulatory sides of the fence. In January this year, Digital Asset appointed former chairman of the United States Commodity Futures Trading Commission (CFTC), J. Christopher Giancarlo, to its board of directors, while in August 2021 former US Securities and Exchanges Commission (SEC) chairman Jay Clayton joined crypto platform Fireblocks as an advisor.  

“Regulators around the world have begun to realize the full scope of digital assets and the role they play in the global economy and as a result are rushing to establish fulsome policies that protect market participants at all levels,” commented Grant. “I am looking forward to working with regulators and establish an open dialog in order to advance regulation that benefits both the investors that use our services and the wider crypto industry.” 

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US crypto exchange FTX US has confirmed that it will be making 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 thorny problem , 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.  

The new partnership with IEX, an alternative trading system first launched in 2013 with a focus on investor protection, is another step down this road.  

“To unlock its full potential, the crypto and digital asset industry needs to engage with regulators and truly scale what has been built,” said CEO and Co-Founder of IEX, Brad Katsuyama.  

“From the first conversation with Sam [Bankman-Fried, CEO of FTX and FTX US], it was clear to me that FTX and IEX were truly aligned on the future potential for digital assets and the unique roles our firms could play as partners in shaping market structure that benefits the end investor. We both see the regulators as important allies in providing a clear path forward and attaining the highest possible standards for investor protection. The US market should be the largest player in digital assets globally and we believe that this partnership will help facilitate that.”

Earlier in March, parent company FTX Trading partnered with US-based crypto platform West Realm Shires Services to launch a new unit targeted at institutional investors. 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.

The recent developments accompany a growing interest in regulatory oversight for the sector. On 9 March, President Biden signed into law the ‘Executive Order on Ensuring Responsible Development of Digital Assets’, the first real attempt by US authorities to comprehensively address supervision of the fast-growing crypto space – including the potential development of a US central bank digital currency.  

“The order is a significant step toward developing a comprehensive federal approach on digital assets,” explained law firm Shearman & Sterling in a recent analysis. “Although the order does not prescribe a regulatory framework itself or require the issuance of new rules, it directs various parts of the federal government to issue reports and recommendations on potential regulatory or legislative actions concerning digital assets.” 

In November 2021, non‑state issued digital assets reached a combined market capitalisation of $3 trillion, up from approximately $14 billion in November 2016, marking a compound annual growth rate of 192.5% over the past five years, and this explosive growth has not gone unnoticed.  

“The unique and varied features of digital assets can pose significant financial risks to consumers, investors, and businesses if appropriate protections are not in place,” stated President Biden in March. “In the absence of sufficient oversight and standards, firms providing digital asset services may provide inadequate protections for sensitive financial data, custodial and other arrangements relating to customer assets and funds, or disclosures of risks associated with investment. 

The latest partnership between FTX and IEX Group looks to be preparing for the potential advent of further regulation, and the two firms have promised more information in the coming weeks on how they plan to broaden investor participation in the digital asset securities market – including a new initiative encouraging all investors to join the conversation about the future of market structure for digital asset securities. 
 
“Investing in IEX created a tremendous opportunity for FTX US,” commented Bankman-Fried. “With this investment, we’re aligned with one of the most trusted and innovative companies in equities markets. I’ve long respected Brad’s vision for IEX to be an exchange that caters to the needs of the investor and treats them fairly – part of the reason why we’ve operated similarly at FTX. As a result, we will collaborate on the further establishment of crypto market structure and work closely with regulators, allowing institutions around the world to enter the marketplace seamlessly.” 

The move comes as institutional interest in digital assets continues to grow. In December 2021, research from London-based digital assets hedge fund manager Nickel Digital Asset Management revealed that over $60 billion worth of Bitcoin is currently held through various Bitcoin closed-ended trusts and exchange traded products, with US and Canadian funds accounting for an overwhelming 75% of the holdings. 

Anatoly Crachilov, CEO and founding partner of Nickel Digital, said analysis of digital assets performance versus traditional asset classes shows sizable outperformance by digital assets over the medium to long term. “This helps explain the increasing interest in digital assets by corporations and institutional investors as part of their wider asset allocation.” 

In January, MSCI moved into the digital asset sphere for the first time through a collaboration with institutional digital asset investment product and services provider, Menai Financial Group; while sector is also creaming off industry talent, poaching numerous high-level executives from more traditional roles.

Most recently, decentralised Financial Market Infrastructure (dFMI) firm Bosonic hired former global head of LCH ForexClear, Paddy Boyle, as its global head of clearing and derivatives; while in November 2021 Citi promoted Puneet Singhvi from its global markets business to head up digital assets for its institutional client group, with plans to hire up to 100 more within the division.  

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