FX-style crypto platforms could bridge gap with TradFi

Emergence of execution-only ECNs, prime brokers and clearing houses brings new confidence in crypto

There have been several crypto platform launches this year that suggest the market may finally be achieving sufficient maturity for the traditional finance world.

Crossover Markets and Cyaptor, for instance, which went live in March and April, respectively, aim to provide a bridge for market participants to trade spot cryptocurrencies on foreign exchange-like platforms that they are already familiar with.

The launches followed the collapse of FTX in November last year, which sparked demands for separate custody services from the exchanges, and to have FX prime brokerage-style arrangements that can better manage credit relationships.

The key feature of this new breed of platform is that they are execution-only electronic communication networks (ECNs), meaning clients need a credit sponsor to trade on them.

Hidden Road Partners – a crypto prime broker – has become an important player in providing credit and market access to these platforms. Trades executed between counterparties are intermediated by Hidden Road, which calculates margin calls and netting positions across counterparties. The use of credit and leverage also enables institutional firms to trade crypto over the counter on a scale similar to the FX market.

In addition to crypto-native prime brokers and ECNs, specialist clearing houses are becoming more prominent. For example, ClearToken is a start-up building a central counterparty (CCP) for digital assets. It completed a proof-of-concept this month, working with 60 market participants to develop a service where investors, exchanges, banks, market-makers, prime brokers and custodians can face the clearing house instead of each other for trading spot crypto.

Nevertheless, the series of high-profile controversies involving crypto-native companies over the past two years means there is still appetite for more established providers to offer these services.

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However, establishing a clear division of responsibilities could open the door for traditional FX venues to provide a market structure whereby dealers could trade crypto. Some FX venues have already launched, or are looking to launch, offerings that might push the crypto market towards an FX-style interdealer and dealer-to-client structure.

EBS has announced intentions to launch a bitcoin non-deliverable forward, following increased demand from its bank and non-bank clients, as well as certain crypto-native trading firms. Deutsche Börse’s 360T is also exploring plans to roll out similar services. Bermuda-based 24Exchange was the first of the established FX venues to offer crypto NDFs in March 2022.

Yet progress from EBS and 360T to launch a trading service has been slow. Furthermore, interest from institutional firms has waned significantly due to the lull in volatility in the crypto market. According to a report from research firm CCData in July, trading volumes on cryptocurrency exchanges fell 40% to $1.7 trillion between the first and second quarter and was down 62% compared with a year previously. Spot trading volumes on centralised exchanges remain at historically low levels, recording the lowest quarterly volumes since Q4 of 2019.

The lack of interest also led to Intercontinental Exchange scrapping its US bitcoin futures contract.

Yet there is a glimmer of hope that the market may be turning a corner. Trading activity across spot markets increased in June, following the filing of a bitcoin spot exchange-traded fund by multiple TradFi companies including BlackRock and Fidelity. Crypto insiders also expect the US Securities and Exchange Commission to approve the Grayscale Investments Bitcoin ETF, after the crypto firm won a court case against the agency last month.

As more established names venture into cryptocurrencies, the possibility that traditional FX venues will contend with the crypto-native providers to service them grows more likely.