Prime Brokerage Comes to Crypto
Institutional investment into cryptocurrency and digital assets face the same problem that the spot foreign exchange market has been suffering for several years- the dwindling amount of prime brokerage.
“As tier-one banks de-risk they are moving away from prime brokerage in spot foreign exchange especially since the Swiss National Bank event on January 15, 2015,” Rosario Ingargiola, CEO and founder of OTCXN, told Markets Media. ”They are de-risking to the point where you basically need to have a $100 million balance sheet at this point to get a tier-one prime broker in the spot FX space.”
Without a way to layoff counterparty- and settlement-risk, institutional money will not flow into the new digital markets, he added.
The startup looks to solve the problem by taking a custodian-held asset-based approach in which
permits third parties on its platform to rent balance sheets that cover and finance any necessary leverage while still having full collateralization.
“In effect, anyone who has suitable assets and knows how to price FX risk can participate in providing this part of prime services and get compensated for it,” said Ingargiola. “We can use technology to institutionally crowd-sourced balance sheet in a way that makes sense for everybody. Once clients have assets with the custodian digitally represented on the custodial blockchain ledgers, those assets are freely tradable with anyone else on the network with no counterparty or settlement risk and without any public ledger transactions interfering with the frequency of trading.”
The process consists of those participants who want to rent their balance sheet requesting that their third-party custodian place an administrative lock on the client assets deposited with the custodian. Once locked, OTCXN re-tokenizes the assets, which then can be traded freely on the startup’s secondary market.
The OTCXN tokens are digital representations of the underlying, which is attested to and created by the custodians, that provide cryptographically provable changes in ownership on OTCXN’s proprietary blockchain in real time, noted Ingargiola.
The startup also has used the same architecture for its NY4-based LiquiMath FX ECN, which it launched earlier this week.
OTCXN began RFQ-based trading in mid-November with approximately 13 participating institutions, which grew to 30 by yearend, and connections to crypto-custodians Kingdom Trust and Prime Trust.
The platform also provides an aggregated limit order book, which is a hybrid ECN that aggregates steaming limit orders from market makers, liquidity providers as well as institutional and retail exchanges.
Looking further into 2019, the startup is working to expand its relationships with additional liquidity providers, crypto exchanges, and custodians while investigating a possible change in its regulatory status.
“On the back of our next Series C funding, we are looking to be regulated as a broker-dealer and getting an ATS license,” said Ingargiola. “That is definitely in the cards. We may partner with a strategic partner to get started sooner than later If we can strike the right type of deal and not go through that process. However, we definitely are getting into the security-token offering space.”
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