Crypto

Wall Street prepares for crypto

Despite a downturn in the crypto markets, more and more large institutional investors are looking to invest in crypto.

One of the factors holding them back is the lack of infrastructure for large institutions compared to what exists in traditional and regulated capital markets.

This is changing, as the technological infrastructure for cryptography begins to mature in areas ranging from security to data. One area under development is crypto trading as a service, with APIs and other products that developers and businesses can use to set up crypto trading for their clients.

The latest sign of this maturation is EDX, a new digital asset exchange developed by Wall Street players such as Citadel Securities, Virtu Financial, Fidelity Digital Assets and Charles Schwab, as well as venture capital firms Sequoia Capital and Paradigm.

The digital exchange, led by former Citadel Securities executive Jamil Nazarali, is roughly model on and built on the trading technology of Members Exchange, or MEMX, another exchange that is developed by similar companies as an alternative to major exchanges such as NYSE and Nasdaq.

EDX’s custody and settlement technology is provided by custody and cryptographic infrastructure company Paxos, the companies were scheduled to announce Wednesday.

Paxos, which is a New York State-regulated custodian, holds client accounts in entirely segregated accounts and has signed up large consumer-facing clients to enable crypto trading. Its customers include PayPal, brokers such as Interactive Brokers and others such as Nubank and Mastercard. Paxos has a conditional bank trust charter from the CCO and says he expects his chartered entity, Paxos National Trust, to open later this quarter.

So far, major banks have not gotten into crypto heavily due to accounting, risk, security, and regulatory issues, as well as Federal Reserve requirements and a desire for more mature technology. , said Walter Hessert, chief strategy officer at Paxos. “We still haven’t seen any of the major bank holding companies in the United States bring any of these offerings to market,” he added.

EDX, with its leadership and support from Wall Street firms, could lure big banks into digital assets, he said. EDX “brings the traditional market structure as well as traditional market players to this liquidity offering through the exchange that is really going to be built to support and attract these types of bank holding companies and brokerages,” Hessert said. For example, EDX plans to offer DVP settlement settlementa method of settlement used in traditional securities trading.

EDX is also different from some other crypto providers who are both market maker, exchange and custodian, which can be a conflict of interest and not usually done in traditional markets, Hessert said. .

Larger liquidity pools such as EDX will also increase transparency in the crypto market, Hessert said. Currently, crypto markets can be opaque, with wide spreads and high volatility.

The competition to provide crypto trading, custody, security and related technologies for large institutions is intense. The resulting wave of consolidation has not been smooth sailing: Wyre has canceled its OK to be acquired by Bolt for $1.5 billion last month. But more deals could soon arrive in this sector, as many providers offer overlapping services, analysts say.

Coinbase provides crypto-trading APIs, custody, payment APIs, and related services, seeking to appeal to large and small customers. Coinbase has three related APIs – one general purpose for trading, deposits, withdrawals, and tax reporting; another to disseminate market data; and a specialized FIX API for sophisticated traders. Coinbase, which recently announced an agreement with black rockhas the advantage of 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 emerged to provide quick and easy connections to crypto trading and other services, especially for fintech and crypto developers creating apps. Custody providers such as Anchorage and Fireblocks also offer crypto trading. And others are getting started: Stripe announced some products for merchants to pay 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 intensified,” said Sara Xi, chief product officer at Prime Trust. “So the more you cover the value chain, the more revenue streams you have.”

DriveWealth, which provides stock trading as a service to clients such as Revolut and Cash App, has expanded into crypto and acquired a small company, 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, commerce and wallets for PayPal’s crypto offering. PayPal announced in July that its customers could send and receive crypto, not just buy and sell as before. While consumer interest in crypto may be waning along with the broader market, this latest move has quietly opened up a range of new future uses for PayPal’s large customer and merchant base.

“The on-ramps that have now been created through trusted products are an order of magnitude greater than before PayPal started these transfers,” Hessert said.

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