02.01.2022
By Shanny Basar

Gemini Launches Full Service Crypto Prime Brokerage

02.01.2022 By Shanny Basar

Gemini, the regulated crypto exchange and custodian, is launching a full service prime brokerage for crypto assets as institutional interest in the sector grows.

In January 2022 Gemini announced the acquisition of Omniex, a trading technology platform that provides order, execution, and portfolio management system solutions for institutional crypto trading. Gemini said the integration of Omniex with it’s existing crypto custody, clearing, and over-the-counter trading capabilities will enable the public launch of Gemini Prime in the second quarter of 2022 after supporting a select client base over the past year.

Dave Abner, global head of business development at Gemini, told Markets Media that Omniex stood out as the founders have an incredible knowledge of the financial industry.

Abner said: “They built something suited for the crypto markets to help bridge that gap between the old world and the new world crypto. That really aligns with Gemini’s mission.”

Omniex was founded by chief executive Hu Liang and chief strategy officer John Burnett. Hu most recently oversaw State Street’s Emerging Technologies Center, focused on crypto and blockchain, and the bank’s Asia Pacific electronic foreign exchange platforms and data businesses. Burnett also worked in the Emerging Technologies Center and led crypto and blockchain efforts globally for State Street since 2015. The Omniex team will be joining Gemini to expand and drive platform capabilities for the Prime Services division.

“They have a great team,” added Abner. “We bought more than 20 people that will really help us add heft in trading technology to our broader team.”

The acquisition will also allow Gemini clients to access a greater variety of liquidity platforms said Abner.

“Oftentimes our clients want to trade on Gemini because they like the protection and the security of dealing within the Gemini ecosystem,” added Abner. “Other clients want a consolidated view of multiple markets.”

Gemini is regulated by the New York State Department of Financial Services, a fiduciary and qualified custodian.

Crypto markets are now large enough to allow for positions in sizes relevant to institutional investors according to a report from hedge fund Bridgewater, The Evolution of Institutional Investors’ Exposure to Cryptocurrencies and Blockchain Technologies.

Bridgewater estimated that Bitcoin is about 1.4% as liquid as US equities but high volatility means that a relatively small allocation in dollar terms would still give meaningful exposure on a risk-adjusted basis.

“As a result, our rough estimate would be that an institutional investor could build a liquid cryptocurrency allocation that is comparable in risk exposure to gold or inflation-linked bonds,” said the report.

Bridgewater wrote that institutional investors are at the very early stages of developing exposures, but adoption looks likely to pick up in the coming years.

“The pace of adoption so far has been rapid, especially in smaller institutions (e.g., family offices), such that it bears watching closely,” said the report.

Liquidity

Before joining Gemini Abner worked in the exchange-traded fund industry at WisdomTree Asset Management, including as chief executive of WisdomTree Europe, and at BNP Paribas. He compared building liquidity in  digital assets to building liquidity in ETFs when it was a nascent industry.

Dave Abner, Gemini

“I was intimately involved in creating the liquidity of the ETF industry as it grew between 2000 and 2020 – when I left to come to Gemini,” he said. “I’ve spent a lot of time building liquidity in illiquid products, and we are doing the same thing in the crypto space.”

He believes Gemini can differentiate itself as a crypto native full-stack prime services provider to institutions through providing a unified solution.

“Through this acquisition Gemini can bring together all the different pieces – custody clearing, trading either via OTC or electronic, algorithms, lending and borrowing,” said Abner. “Institutions that are in crypto are piecing together solutions that they need.”

Following the rollout in the second quarter, Gemini Prime aims to provide a single point of access to multiple exchanges and OTC liquidity sources, tools and algorithms to ensure best execution and trade transparency, an institutional-grade trading experience with full API connectivity and financing.

Gemini is also building a sophisticated risk management process. Abner said: “People have been lending and borrowing in traditional markets for years so we are not really doing something new. Crypto is a volatile asset class, but volatility is also nothing new and we manage that risk.”

Custody

Bridgewater highlighted that it is operationally difficult for large institutional investors to access cryptocurrencies.

“We see outright exposures to crypto from large allocators as likely to grow over time, as institutional-quality investment products and service providers continue to develop at a fast pace and more investors and their stakeholders continue along their processes of exploring the asset class,” added the hedge fund. “The investment by many of the major Wall Street banks over the last year in building out new trading desks and infrastructure for Bitcoin and crypto is another indication of expectations that institutional adoption of crypto will grow over the longer term.”

Abner said clients will be able to access prime services as a bundle or a la carte, although most want a unified solution. For example, many institutions have relationships with custodians in traditional finance (TradFi). He argued that custody is one of Gemini’s core products.

“We are one of the largest and most highly- regulated crypto custodians,” said Abner. “We actually look like a custodian in TradFi but with  digital assets.”

In addition, Abner explained that traditional custodians may need to partner with crypto native firms such as Gemini. He continued that Gemini’s institutional clients range from the largest banks to hedge funds, asset managers, robo advisors and family offices.

For example, in November 2021 Commonwealth Bank of Australia said it had made a small minority investment in Gemini in the crypto platform’s first equity raise.  Gemini raised $400m in a round led by Morgan Creek Digital with participation from 10T, ParaFi, Newflow Partners, Marcy Venture Partners, and the Commonwealth Bank of Australia. The round valued the company at $7.1bn after being launched in 2015 by Cameron and Tyler Winklevoss.

Traditional institutions are also building up their crypto operations but Abner argued that it is very important that Gemini has a crypto native infrastructure. He compared building a crypto operation onto a traditional financial firm as similar to a house extension.

“You take a 100 year-old house and add on a modern kitchen and sometimes, you turn on the microwave and the lights in the main house blow out,” he said. “It’s really hard to do these integrations but with Gemini we build onto our crypto native infrastructure.”

Wealth management

In addition to providing services to liquidity-seeking institutions, Gemini is also aiming to work more closely with advisors. In January 2022 Gemini also announced  the acquisition of BITRIA, formerly Blockchange, a digital asset portfolio management platform. The firm said the integration of BITRIA’s technology with Gemini’s custody and exchange capabilities provides advisors with access to the entire crypto ecosystem and the ability to manage their clients’ portfolios from one interface.

Abner said: “We’re legitimately the only ones thinking about providing these services to the wealth management industry.”

Many advisors currently have limited access to just one or two tokens through closed-end funds and spot crypto ETFs in jurisdictions where they are available. In addition, the US SEC has not approved a spot crypto ETF.

“A Bitcoin ETF is like the first lick of an ice cream cone whereas you really want to get to the cone or the chocolate chips, or whatever’s in there,” said Abner.

The BITRIA integration will provide  access to more than 70 cryptocurrencies available on Gemini’s exchange and other features including portfolio rebalancing, tax loss harvesting and account planning.

There is currently a sell-off in crypto markets but Abner does not believe this will change institutions’ long-term plans to enter the sector.

“Our institutional business has grown multiple times over this past year,” he said. “Growth is going to continue over this year and rather dramatically in this leg of the stool.”

In 2007 Abner had said that the best thing for the ETF industry at the time would be a crash that puts money in motion. Investors would take money out of mutual funds, and come back to the market in ETFs.

“Money in motion is really good for the crypto industry,” he said. “More money leaving TradFi that is looking for alpha is going to come into crypto over the next several years.”

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