Institutional Crypto Competition Heats Up

Shanny Basar

Graham Rodford, chief executive of Archax, said the new digital asset exchange aimed at institutions will differentiate itself from competing ventures as the firm’s team and advisers have extensive experience of working in UK-regulated environments.

Rodford told Markets Media: “We know the controls and potholes that traders look for in a platform.”

He was previously chief operating officer, chief compliance officer and partner at Omni Partners, a $1.4bn hedge fund based in London and remains a non-executive partner. Prior to Omni, he worked at HSBC, Caliburn Capital and Coutts Bank.

Graham Rodford, Archax

Archax aims to be regulated in London but the firm is also reviewing other jurisdictions with the aim of launching in the first quarter of next year. “We are in discussions with a data centre and a matching engine to design the platform with functionality that suits institutions,” Rodford said.

In addition, through partnerships with existing trading system vendor firms and support for industry standard APIs such as the FIX messaging standard, traders will be able to integrate Archax into their existing workflow.

One of the hurdles for institutions has been finding suitable custodians for digital assets. Rodford said Archax will segregate customer assets and is finalising proposals with a custodian. Sophisticated institutions will be able to use their existing custodian relationships but Archax will be able to recommend a solution to traders without these relationships.

“Not everything in the traditional securities world will move to the new world,” Rodford added.

Archax has initial venture capital funding from Alphabit but will also raise money through an initial coin offering, which will represent ownership of the firm.

Rodford said: “Tokenisation will happen faster than most people believe given the speed in the last three months. It will happen in a few years, not in decades.”

David Lester

David Lester, former chief strategy officer of the London Stock Exchange Group and advisor and non-executive director at Archax, said in a statement: “Tokenisation and blockchains are innovations that have significant potential to disrupt and open up new business opportunities. I am pleased to be an advisor to Archax, a strong team of likeminded individuals whose mission is to bring global institutional capital to the crypto asset space, which will underpin and accelerate its adoption.”

Sam Woods, deputy governor of the Bank of England and chief executive of the Prudential Regulation Authority, yesterday wrote to chief executives of of banks, insurance companies and designated investment firms to remind them of the relevant obligations under the regulator’s rules and its expectations regarding firms’ exposure to crypto-assets.

“We acknowledge that firms may have taken limited exposure to crypto-assets to date, and hope this letter is helpful to firms in considering any existing exposures and/or plans for the future,” he wrote. “We also recognise that the underlying distributed ledger or cryptographic technologies, on which many crypto-assets rely, have significant potential to benefit the efficiency and resilience of the financial system over time.”

Concerns Raised

Woods raised concerns over high price volatility, relative illiquidity, fraud and manipulation, as well as money-laundering and terrorist financing risks. He continued that for prudential purposes, crypto-assets should not be considered as currency. Woods said: “Entering into activity related to crypto-assets may give also rise to reputational risks.”

The regulator continued that discussions are ongoing on the prudential treatment of crypto-assets, including amongst authorities internationally.

CryptoUK, the self-regulatory trade association for the UK cryptocurrency industry which aims to promote higher standards of conduct, responded to Woods’ letter.

Iqbal V Gandham, chair of CryptoUK, said in a statement: “It is important to stress that the majority of firms within the cryptocurrency sector operate to a high standard, replicating existing models of compliance and best practice for financial services firms. Nonetheless, the concerns raised by the Deputy Governor support CryptoUK’s calls for regulation, set at an appropriate level that allows firms operating within the sector to grow and flourish.”

Global Digital Finance, an industry body, has also been seen set up to create a global rulebook around cryptocurrencies. This week the organisation published the first draft of its code of conduct for public review together with a suggested taxonomy. The public consultation runs until 30 August 2018 with the goal of wider adoption in the second half of the year.

Simon Taylor, a distributed ledger and cryptocurrency specialist who leads the GDF initiative, said in a statement: “We are an open community, and proud to already count 170 industry contributors. We are in constant dialogue with policymakers, regulators and industry bodies across the globe – and are encouraging a transparent, inclusive and global consultative process to develop the code.”

The statement continued that many professionals in financial markets acknowledge that tokens and distributed ledger technology can create efficient, fair and transparent market structures in the coming decades but standards are needed to prevent misuse and misrepresentation

“Although cryptoassets are global in nature, there is no clear single regulatory authority or standard to govern their use and protect investors,” added GDF. “In addition, the convergence of tokenisation with traditional asset categories like securities and derivatives calls for a clear set of principles to guide its development.”

Richard Johnson

Richard Johnson, vice president in consultancy Greenwich Associates’ market structure and technology practice, focusing on equities and financial technology, said in a report that institutional interest in the space has begun, as indicated by the newly launched bitcoin futures on CME and CBOE.

“This institutional interest is only likely to grow as the SEC lays out a regulatory framework, so it is important that investors understand the developments occurring in the space and the potential regulatory path forward,” he added. “While there is a real risk that over-regulation of the space will drive innovation and capital formation to other jurisdictions, the flip side of the coin (or token), is that sensible regulation that protects investors and welcomes innovators will enable a thriving technology startup ecosystem. “

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