“Looking for Liquidity”

“OnTheBlock: Looking for Liquidity” takes place on Tuesday, December 4th, at the Princeton Club of New York, featuring an opening interview with Daniel Gorfine, Chief Innovation Officer, Lab CFTC. The afternoon event, which is open to buy side/institutional investors is sponsored by Genesis Global Trading.

OnTheBlock is an exclusive series of Cryptoasset and Blockchain-focused events for institutional investors hosted by Profit & Loss. This seriesof intimate, invitation-only events for buy side attendees (max of 50 attendees) is designed to discuss the opportunities in cryptocurrencies and blockchain technologies for institutional investors and traders.

Tuesday, December 4, 2018

The Princeton Club of New York


Sponsored by Genesis Global Trading


4:30-4:45pm – Registration

4:45-5:15pm – Fireside Chat with Daniel Gorfine, LabCFTC

5:15-6:00pm – Panel Discussion

6:00-6:30pm – Audience Q&A

6:30-7:30pm – Networking Reception

In the past year, cryptocurrency trading volumes have exploded, with the market capitalization of bitcoin alone increasing roughly 382% from May 2017.

Yet despite the astronomical growth of crypto markets, the overall market cap of all these assets combined is $382 billion. This is still relatively small compared to the types of markets that institutional investors are typically used to trading – for comparison, the daily notional volume of FX trading was estimated at $5.1 trillion by the Bank for International Settlements (BIS) in its 2016 triennial survey.

In addition, there are big questions about where and how institutional investors should access this liquidity. For example, with so many providers now claiming to offer an “institutional grade” service, how should firms differentiate between them? Will consolidation amongst trading venues occur and what will the future liquidity environment look like in the crypto space?

This panel will also discuss:

  • What cryptoassets are derivatives exchanges likely to launch next, and how will this impact the wider market?
  • What are the continuing operational challenges for institutional market participants wanting to trade on crypto exchanges?
  • Is the OTC market too opaque for institutional investors?
  • How will regulatory concerns and developments drive the liquidity landscape going forward?

Seating is limited, please request an invitation by emailing gina@profit-loss.com

OTXCN Signs Kingdom Trust as Third-Party Custodian

OTCXN, a blockchain-powered capital markets infrastructure company, has signed Kingdom Trust to serve as a neutral, third-party custodian of assets for trading entities and exchanges that use its technology to facilitate clearing and settlement of OTC block trades and cross-exchange trading.

Kingdom Trust is an independent qualified custodian with a decade of experience in the alternative asset space. As a regulated trust company, Kingdom Trust offers a regulatory compliant environment, including AML/KYC, for both domestic and international clients. The firm also offers custody solutions for cryptoassets.

“The biggest problem for institutions in the cryptocurrency space prior to OTCXN’s launch has been the lack of a clearing and settlement solution that eliminates trading counterparty and settlement risk, while connecting all global liquidity providers and exchanges. OTCXN’s multi-custodian solution solves this problem and delivers global liquidity access with a single account at the preferred custodian of a trading desk or exchange. Kingdom Trust will play a key role in supporting the expansion of the OTCXN network by providing clients with safe and capital efficient access to this global liquidity through OTCXN’s market leading trading platforms,” says OTCXN in a release issued today.

The firm’s CEO and founder, Rosario Ingargiola, comments: “We are extremely pleased to have Kingdom Trust on board and using OTCXN’s custodian desk platform to support our mutual institutional clients that trade digital assets such as cryptocurrencies over OTCXN’s unique network. Kingdom Trust is one of only a few regulated US entities that offers stand-alone custody services in both fiat and cryptocurrencies. They stand out for their integrity, experience, state-of-the-art infrastructure and client asset protection.”

Matt Jennings, CEO of Kingdom Trust, adds: “By partnering with OTCXN, Kingdom Trust will be able to offer its clients the best of both worlds, i.e., the ability to ‘trade hot, store cold’. The OTCXN platform, its network, and partners will offer the power of rapid liquidity to clients and markets where that has been in short supply. The combined solution leverages technology to eliminate counterparty and settlement risk, delivering benefits for all participants in the ecosystem. We are excited to play a role in this transformative approach.”

FSB Outlines Potential Financial Stability Issues from Crypto-Assets

The Financial Stability Board (FSB) today published Crypto-asset markets: Potential channels for future financial stability implications. The report sets out the analysis behind the FSB’s proactive assessment of the potential implications of crypto-assets for financial stability.

The report includes an assessment of the primary risks present in crypto-assets and their markets, such as low liquidity, the use of leverage, market risks from volatility, and operational risks. Based on these features, crypto-assets lack the key attributes of sovereign currencies and do not serve as a common means of payment, a stable store of value, or a mainstream unit of account, says the report.

Crypto-assets do not pose a material risk to global financial stability at this time, FSB finds. However, vigilant monitoring is needed in light of the speed of market developments, it says. Should the use of crypto-assets continue to evolve, it could have implications for financial stability in the future. Such implications may include: confidence effects and reputational risks to financial institutions and their regulators; risks arising from direct or indirect exposures of financial institutions; risks arising if crypto-assets became widely used in payments and settlement; and risks from market capitalisation and wealth effects.

Crypto-assets also raise several broader policy issues, FSB says, such as the need for consumer and investor protection; strong market integrity protocols; anti-money laundering and combating the financing of terrorism (AML/CFT) regulation and supervision, including implementation of international sanctions; regulatory measures to prevent tax evasion; the need to avoid circumvention of capital controls; and concerns relating to the facilitation of illegal securities offerings. These risks are the subject of work at national and international levels and are outside the primary focus of this report, says FSB.

Additionally, FSB says members have to date taken a wide variety of domestic supervisory, regulatory, and enforcement actions related to crypto-assets. National authorities and standard-setting bodies have issued warnings to investors about the risks from crypto-assets, as well as statements supporting the potential of the underlying distributed ledger technology (DLT) that they rely on to enhance the efficiency of the financial system. These actions are balanced between preserving the benefits of innovation and containing various risks, especially those for consumer and investor protection and market integrity, it says.

The FSB coordinates at the international level the work of national financial authorities and international standard setting bodies and develops and promotes the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with 65 other jurisdictions through its six regional consultative groups.

The FSB is chaired by Mark Carney, Governor of the Bank of England. Its Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

ErisX Announces New Digital Assets Exchange

ErisX is making a bet on crypto-assets with plans announced last week that it will launch a derivatives exchange (DCM) and clearing organisation (DCO) that will include fully regulated digital asset futures and spot contracts on one platform.

The new venture is already backed by an impressive group of investors spanning the traditional capital markets and digital asset markets, including DRW Venture Capital, Valor Equity Partners, TD Ameritrade, Virtu Financial, NEX Opportunities, Cboe Global Markets, CTC Group Investments, Digital Currency Group, Nico Trading, Pantera Capital and Third Stone Partners. It has additional support from CMT Digital, Susquehanna International Group, XR Trading, C2 Capital Management and ED&F Man Capital Markets Inc, which also participated in the investment round.

According to the firm, ErisX is designed to bring a regulated, transparent and stable venue to the digital asset market with the reliability and trusted infrastructure of a centralised exchange. Thomas Chippas, former head of global quantitative execution at Citi, has joined as CEO of ErisX. Neal Brady has been named Executive Chairman.

“Closing this round of funding enables us to accelerate investments in the platform and our team,” says Chippas. “Leveraging our heritage and experience with exchange infrastructure, our market participants will benefit from modern trading tools on a fair and transparent platform. ErisX’s enhanced experience will provide the opportunity for new participants to enter the digital asset market and existing participants a superior venue for their execution and clearing needs.”

“ErisX will eliminate many of the impediments to institutional adoption and usher in a new wave of market participants,” adds Don Wilson, founder and CEO of DRW, which includes Cumberland. “This further develops the digital asset space and brings more transparency to these evolving markets.”

“To function efficiently, financial markets must demonstrate security and compliance, two critical gaps in today’s digital asset markets,” says Antonio Gracias, founder and managing partner at Valor Equity Partners. “ErisX has recognised there is a monumental opportunity to re-imagine digital asset trading, and they’ve developed a platform to deliver a highly secure yet revolutionary experience that will work better, and for more participants.”

“As investors in ErisX, as well as a strategic contributor in the initiative, we are looking forward to advancing our innovation goals by working with an established, CFTC-regulated exchange that will include digital asset futures and spot contracts on a single platform,” says Tim Hockey, president and CEO, TD Ameritrade. “Working with these innovative companies gives us the opportunity to help them develop cryptocurrency products that we believe will fill a gap for retail investors within the digital currency ecosystem.”

“As a global liquidity provider, Virtu supports and engages products and venues across various asset classes,” says Douglas Cifu, CEO of Virtu Financial. “Given the transparent ErisX market model and regulatory framework, it’s natural we would want to provide liquidity and grow this digital asset market centre.”

More recently, CQG, which provides trading, market data, and technical analysis tools, announced a collaboration with ErisX to provide its CQG Desktop as the front-end trading platform.

CQG president, Ryan Moroney, says: “We see the value that ErisX brings to the digital asset space and are excited to partner with them to present the spot crypto markets together with futures contracts on a single platform. In an industry in need of this level of security and transparency, we believe ErisX will open these markets to many of our institutional partners and help move this emerging market forward.”

“We were impressed with the range of trading tools that were included in CQG’s platform offering and are pleased to offer CQG Desktop as our front-end trading provider,” adds ErisX’s Chippas. “We are working with a robust group of leading class technology and service providers to improve the digital asset trading experience.”

Is the Golden Age of Crypto Already Over?

On September 18, at approximately 1:00pm Eastern, the golden age of cryptocurrencies came to an abrupt end. At that time, the Office of the New York Attorney General dropped a report on the operations of many major cryptocurrency exchanges that found serious faults with both specific firms and the industry as a whole. Most ominously, the report stated that it had referred three platforms that had declined to provide information voluntarily to the NY AG to the “Department of Financial Services for potential violation of New York’s virtual currency regulations”.[1]

For a field that has thrived for nearly a decade in an environment where regulators generally tried to have a soft touch, this report was a rude awakening. Yet, the report and the response to it also shows the two paths that lay open to crypto currency in the years ahead: increased engagement with regulators in a way that leads to mutually acceptable regulation, or an escalating series of confrontations that just may kill this new product class in its cradle.

In many ways, it’s surprising that a US regulator hasn’t dropped a similarly tough report or package of regulations yet on cryptocurrency. Even after a burst of negative events, significant volatility, and a number of hacking events, there was no crackdown on crypto from any one body or swiftly called congressional hearing to question the utility of cryptocurrencies. Instead, Members of Congress raced to join Blockchain caucuses, prudential regulators didn’t try to find a fatal flaw in the products, and the SEC and CFTC under both Democratic and Republican Chairs declined to throw tough new regulations on cryptocurrencies.

Yet, into that vacuum of regulation ran the New York Attorney General. In mid-April of this year, then-New York Attorney General Eric Schneidermann announced that his office was launching the “Virtual Markets Integrity Initiative”, a fact-finding inquiry into the policies and practices of platforms used by consumers to trade virtual or “crypto” currencies like bitcoin and ether.”[2]As part of that initiative, Schneidermann’s office announced that it had sent “sent letters to 13 major virtual currency trading platforms requesting key information on their operations, internal controls, and safeguards to protect customer assets”.

The response to this effort was relatively muted. While Kraken publicly and loudly refused to comply with the NY AG’s information request, there were no other public objections to the inquiry. In fact, Gemini quickly announced that it “applauds the Attorney General’s focus on this industry and the Virtual Markets Initiative”, and Coinbase “applaud[ed] the OAG for taking action to bring further transparency to the virtual currency markets”.[3]With the industry largely adopting a stance of publicly complying with the information requests and Schneiderman himself forced to resign less than a month later following allegations of physical and sexual abuse, the probe seemed more likely to fizzle out than anything else.

Yet, the NY AG’s report that dropped last week ended up containing more than a few incendiary bombshells. Across over 40 pages, the NY AG provided a comprehensive diagnosis of problems within the cryptocurrency industry, focused on the 10 firms that voluntarily provided information. Perhaps most disconcerting was the report’s claims that many exchanges were not doing enough to confirm users’ identities and prevent unauthorised access. As the report notes, many of the 10 exchanges are prohibited from operating in a number of states, with two, BitFinex and Tidex, “prohibited in all of the United States”.[4]However, the report alleges that eight of the exchanges don’t block the use of masked virtual private networks (VPN) addresses to access their systems, and several firms require users to turn over only a minimal amount of personal information before they may trade. One firm, Tidex, only asks users for a name, email and mobile number. Given that one of the primary complaints about cryptocurrencies has been the risk that it could be used as a means of money laundering or evading sanctions, the report suggests that at least some of those fears may be grounded in reality.

The report also raised serious concerns about operations at many firms. According to the report, only four of the 10 firms have formal policies in place to deal with market manipulation. Given the overall lack of prohibitions on traders using VPN to access these firms’ systems, the report implies that all the firms may have difficulties actually preventing and stopping market manipulation. “Where a platform – for example, Bitfinex – neither requires documentation to execute a virtual currency trade nor takes active measures to block access via VPN, there is reason to question the effectiveness of that platform’s efforts to address manipulative or abusive trading activity.”[5]

The report further suggests that conflicts of interest abound in the industry. Per the report, only one firm, HBUS, prohibits employees from trading on its platform, and half the firms engaged in some variation of proprietary trading on their own venues.[6]

Additionally, “No platform articulated a consistent methodology used to determine whether and why it would list a given virtual asset.”[7]The report does make clear that many of the firms have some policies in place to disclose information that touches on some potential conflicts of issue. Yet, the report consistently compares cryptocurrency firms unfavourably to more established financial markets on these points, and the report suggests that the exchanges’ primary response to complaints about conflicts is to stress that “their trading desks had no informational or other trading advantage over customers”.[8]

However, not all the alleged issues that the report alleged with cryptocurrency platforms seem to be borne out as actual problems. At various times, the NY AG report seems to find fault with cryptocurrency platform practices that are common in other financial markets. For instance, the report expresses concern that “several platforms reported that they had no formal policies governing automated trading”, despite the fact that no major US regulator has finalised regulations on algorithmic trading in any major financial market.[9]Similarly, the report also suggests that the ability for professional traders to utilise co-location and complex tools on these platforms means that there is a “preference” given to professional traders over  “other platform customers”.[10]Yet here again, the report seems to be discovering issues with cryptocurrency exchanges that are endemic to other major financial markets.

While some observers may read these complaints as evidence of a lack of knowledge within the NY AG’s Office about financial markets and grounds to ignore this report’s conclusion, such a perspective may miss the forest for the trees. The NY AG isn’t the entity responsible for most financial regulation in New York. That responsibility belongs to the New York Department of Financial Services. It is possible that experienced financial regulators may find other major issues with those firms if they also undertake their own serious review.

And it appears such reviews are likely to begin in the near future. As mentioned above, the NY AG announced that it was referring three of the four firms that didn’t provide the request for information to the Department of Financial Services for further review. While at least one of those three firms, Kraken, has responded volcanically to this news, these actions are likely to only increase the scrutiny all cryptocurrency firms will face. After all, the general view among regulators is that any firm that seeks to refuse a request to engage with regulators must have something to hide.

Meanwhile, some employees of at least one major federal financial regulator were sharing the details of the report on social media, and the head of CME Group said last week that the report’s allegations were concerning. It is likely that the report’s findings of issues with many platforms’ policies on unauthorised access and operations will spur additional investigations by the major financial regulatory bodies, if only to show that the regulators are not ignoring potential risks. Other state attorneys general or state securities regulators may create their own cryptocurrency initiatives. There may also be increased scrutiny from Capital Hill in the new year as a likely bevy of new, more liberal Members look for issues to champion that are in the news.

The greatest danger posed by the report, however, is the possibility that the Treasury Department increases its scrutiny of whether cryptocurrency is being used as a growing means of money laundering and sanctions evasion. Many of the issues flagged by the NY AG report suggest that cryptocurrency platforms may not be adequately protected from such illicit activities. There is a real danger that key actors in the Treasury Department, which is less invested in the success of cryptocurrencies than the market regulators, may decide that the risks of cryptocurrencies to current anti-money laundering and sanctions reforms outweigh their benefits and begin pushing to crack down on cryptocurrency platforms.

Regardless, the report heralds the end of an era for crypto. For nearly a decade, cryptocurrency was allowed to develop relatively free from government oversight and regulation. Now, cryptocurrency is in the spotlight for a host of regulators and law enforcement agencies. How the cryptocurrency responds to this change will determine the next 10 years for the industry. Engagement with the regulators may be somewhat costly, but likely will allow the industry to keep growing and in a way that is more amenable to institutional investors. Efforts to stonewall the newly interested and skeptical regulators could result in the industry being killed in its cradle. One way or another, there’s about to be a sea change for crypto currencies in America.

Justin Slaughter is Managing Director at Mercury Strategies.
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