What are the main benefits of leveraging blockchain technology for electronic trading applications?
The automation that’s possible with digitized assets, natively digital agreements (e.g., smart contracts) and the programmatic enforcement of obligations, including making payments without reliance on paper contracts and threat of litigation, drastically reduces cost and friction and can actually grow the overall market size and exponentially increase liquidity. Provability provided by digitally signed operations can eliminate the need for trust and reduce costs associated with solving for trust, e.g., “renting” the balance sheet of a Tier-1 bank to stand behind when facing counterparties.
Why is your platform so unique and what does its blockchain backbone enable it to do?
We provide technology infrastructure to clear and settle transactions between counterparties instantly with zero risk, and perhaps most importantly, without becoming a counterparty to the trades or using our own balance sheet. This same blockchain-based way of managing collateral makes it possible to institutionally crowdsource a virtually unlimited balance sheet for things like margin financing across a much more diverse group of providers.
How does your system work and what are the key steps involved?
Multi-Custodian Blockchain Network: We built a network of the most trusted, regulated custodians and give them our blockchain solution.
Tokenization: Custodians tokenize (digitize) assets they hold on behalf of their clients. This can be any asset like Bitcoin or USD and could just as easily be US Treasuries, Gold or even a Credit Line.
Issuance: Assets are provably issued (represented) onto the custodian blockchain ledgers.
Pre-trade Risk Check: We read the ownership of tokenized assets into real-time, pre-trade risk on our global exchange network.
Connect: Our institutional-grade exchange and block trading platform connects clients to freely trade these digitized assets.
Match/Clear/Settle: Matched orders are executed and instantly cleared and settled on our custodian blockchain ledgers using an atomic swap (concurrent transaction) that guarantees settlement finality.
Update: Asset balances are updated in real- time on the trading network so clients can instantly re-trade assets without any delay.
How does your technology help to solve many of the challenges facing institutions in the cryptocurrency space?
The primary barrier to adoption by institutional investors – not prop trading firms, but fiduciaries managing other peoples’ money – is the counterparty and settlement risk in the crypto space.
How can a fiduciary enter into a block trade with an OTC desk where they have to send funds first and hope for the digital assets to be delivered?
The second major problem is liquidity fragmentation. How does a large traditional asset manager make investments at scale without tradable liquidity aggregation? Our competitor’s aggregation solutions force you to either give your assets to them (upstart exchange or agency broker) so they can trade with other unknown counterparties on your behalf, or, you have to have your own direct account and assets deposited at each underlying exchange and a credit line with each market maker and bear the counterparty and settlement risk. In both cases, counterparty risk is unacceptably high for a fiduciary and you will face limitations around tradability and movement of the assets.
Only an instant clearing and settlement solution that operates on provable assets at a neutral, regulated custodian can solve these problems, and that’s what we’ve built. Our multi-custodian blockchain network is able to deliver a fiduciary-grade solution without our holding client funds or becoming a counterparty to the trades and without the aforementioned risks and limitations.
What proprietary blockchain-based solutions have you developed especially for Custodians and why is it so appealing to them?
We are providing custodians with a complete turn-key asset digitization and blockchain-based ledger system which is integrated into all of our products and services that facilitate the complete secondary market trading lifecycle. And it connects their clients to the clients of other custodians so that they can trade without assets leaving the respective custodial wallets.
The most exciting new product for custodians is our Cross-Custodian Net Settlement capability. This allows custodians to initiate and complete net settlement transactions with each other on behalf of all clients in the aggregate. In a future release, clients will be able to make self-directed payments of fiat, crypto or any digitized assets cross-custodian, which has profound implications on payments, which is a business line we will enter in the future.
Custodians generally appreciate our zero barriers to entry model that they do not have to do any technology or integration work to get started and go live. We deliver the solution for free and we pay them a revenue share on trading transaction fees, which is very important given that custody fees are trending to zero.
What are the advantages of having an immutable record of all transactions on a proprietary blockchain layer?
The primary advantage is provability and the elimination of trust dependencies. The consensus mechanism between ourselves and the custodial blockchain ledgers, for example, allows the network to know if a custodian altered their ledger. If they did, or if the music ever stops, there are multiple parties with a verifiably accurate and identical copy of the golden source of truth.
In what ways can we expect to see Blockchain technology being exploited still further to support both FX trading and the fast-evolving world of digital assets?
One of the things we are most excited about is supporting spot FX trading with leverage where one or both counterparties do not have a Prime Broker and without credit intermediation from a Prime-of-Prime, while completely eliminating counterparty and settlement risk. We will of course continue to layer on additional services like lending and payments, as well as support for credit-based trading in crypto and FX that are dependent on blockchain.