Despite a downturn in the crypto markets, more and more large institutional investors are trying to invest in crypto.
One factor holding them back is the lack of infrastructure for large institutions compared to what exists in traditional, regulated capital markets.
That is changing as the technological infrastructure for crypto begins to mature in areas ranging from security to data. One area that is expanding is crypto trading as a service, with APIs and other products that allow developers and businesses to set up crypto trading for their clients.
The latest sign of this maturation is EDX, a new digital asset exchange being developed by Wall Street players including Citadel Securities, Virtu Financial, Fidelity Digital Assets and Charles Schwab, as well as venture capital firms Sequoia Capital and Paradigm.
The digital exchange, run by former Citadel Securities executive Jamil Nazarali, is roughly modeled on and built on trading technology from Members Exchange, or MEMX, another exchange being developed by similar companies as an alternative to major exchanges like NYSE and Nasdaq.
EDX’s custody and settlement technology is provided by crypto custody and infrastructure company Paxos, which the companies plan to announce on Wednesday.
Paxos, a New York State-regulated custodian, maintains client accounts in fully segregated accounts and has signed on large consumer-facing clients to enable crypto trading. His clients include PayPal, broker-dealers like Interactive Brokers, and others like Nubank and Mastercard. Paxos has a conditional bank trust charter from the OCC and expects its chartered entity, Paxos National Trust, to open later this quarter.
Until now, major banks have not focused heavily on crypto due to accounting, risk, security and regulatory concerns, as well as Federal Reserve requirements and a desire for more mature technology, said Walter Hessert, Paxos’ head of strategy. “We haven’t seen any of the major bank holding companies in the US launch any of these offerings,” he added.
EDX could attract big banks to digital assets with its leadership and support from Wall Street companies, he said. EDX brings “traditional market structures and also traditional market participants to this liquidity offering through the exchange that is really being built to support and attract these types of bank holding companies and brokers,” Hessert said. For example, EDX plans to offer delivery settlement versus payment settlement, a settlement method used in traditional securities trading.
EDX also differs from some other crypto providers, which are market makers, exchanges and custodians all in one, which can create a conflict of interest that doesn’t typically occur in traditional markets, Hessert said.
Other large liquidity pools like EDX will also increase transparency for the crypto market, Hessert said. Currently, crypto markets can be opaque, with wide spreads and high volatility.
Competition for crypto trading, custody, security and related technologies for large institutions is intense. The resulting wave of consolidation isn’t without its hiccups: Wyre canceled its deal that was set to be acquired by Bolt for $1.5 billion last month. But more deals could soon follow in this space, as numerous providers overlap services, analysts say.
Coinbase offers crypto trading APIs, custody, payment API and related services to attract large and small customers alike. Coinbase has three related APIs – a general purpose API for trading, deposits, withdrawals, and tax reporting; another for streaming market data; and a specialized FIX API for experienced traders. Coinbase, which recently announced a deal with BlackRock, has an advantage in routing orders to its own exchange or, for large clients using its Prime API, to other liquidity providers.
A number of other API providers such as Prime Trust, MoonPay, Wyre and Transak have sprung up to offer quick and easy connections to crypto trading and other services, particularly for fintech and crypto developers building apps. Custody providers such as Anchorage and Fireblocks also offer crypto trading. And others are jumping in: Stripe has announced products that allow merchants to cash out in crypto or convert fiat to crypto.
“The convergence we’re seeing in the industry is that people are moving up and down the value chain as competition has increased,” said Sara Xi, chief product officer at Prime Trust. “So the more you cover in the value chain, the more revenue streams you have.”
DriveWealth, which offers stock trading as a service to clients like Revolut and Cash App, has expanded into crypto, acquiring a smaller firm, Crypto-Systems. The company can send crypto trades to multiple exchanges and liquidity sources to get the best prices, said Duncan Wells, market strategist at DriveWealth.
Paxos provides custody, trading and wallets for PayPal’s crypto offering. PayPal announced in July that its customers would be able to send and receive crypto, not just buy and sell as before. While consumer interest in crypto may have waned with the overall market, this latest move has quietly opened up a number of future new uses for PayPal’s large customer and merchant base.
“The ramps that Trusted Products have now created are an order of magnitude greater than before PayPal introduced these transfers,” Hessert said.
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