Not long ago, I wrote a piece about why traders are swapping crypto for traditional asset classes. My view still stands that this shift is taking place. However, a recent report by the Financial Times has thrown into the mix a new opportunity for asset managers to feel more comfortable adopting crypto into their portfolios.
That’s the ability to trade digital assets through digital market trading platforms that are backed by well-known, trusted names in the finance industry and benefit from low latency and security, which established crypto exchanges struggle to provide.
You may remember the launch of EDX Markets – one of these platforms backed by Charles Schwab and Citadel Securities – back in September last year which was positioned as “a first-of-its-kind exchange that will address latent demand for digital assets trading by enabling safe and compliant trading of digital assets through trusted intermediaries”.
Well, EDX along with the exchange Zodia Markets and custody house Zodia Custody (which are backed by the UK lender Standard Chartered) sit at the heart of this report, which says “they are betting that their finance industry expertise and their reputations, unsullied by the wave of crypto scandals and enforcement actions from US regulators, will prove persuasive”.
You could follow Fortune’s Jeff John Roberts’ line of thinking that that story “was planted – complete with talking points – by the PR departments of the would-be corporate kings of crypto”, which I’m sure has some legs.
But it’s hard to ignore what else is going on in the crypto industry and how news like this offers a very attractive opportunity to those who want to trade in digital assets but also want more assurances around the safety and security of their money.
Like the fact that just 24 hours after the US Securities and Exchange Commission (SEC) serves papers to Binance, it announces that it’s also suing Coinbase for “operating a crypto trade asset trading platform as an unregistered national securities exchange”. Ripple is also in a legal wrangle with the SEC.
As Jonathan Shiery, partner at Guidehouse Financial Services says, “institutional investments will likely continue to be constrained until regulatory clarity is made through these cases”.
Despite the SEC’s effort, however, cryptocurrency prices are rising. Bitcoin has seen a 63% rise in value this year-to-date and Ethereum a 57% rise.
Why wouldn’t you want to invest in digital assets with these numbers? Especially if you can be assured that your money is protected.
Answer: Low latency and trust.
They don’t come with the reputational baggage that the established crypto companies have for starters. They are unsullied and backed by trusted names in the business.
But perhaps the most important thing that makes them standout is the infrastructure that they’re based on and the latency advantages they offer.
Unsurprisingly, the point that stood out most to me in this report was around the fact that, unlike other crypto exchanges, these platforms are not building on cloud computing technology. Jamil Nazarali, head of EDX Markets and former Citadel Securities executive said, “the cloud had helped the established crypto exchanges scale ‘very, very fast’, but that it was too slow and unreliable for professional traders”.
We know from our work in this space how important low latency is to institutional traders.
We also know that Binance and Coinbase don’t disclose where their matching engines are located. It creates an even playing field for traders. Which sounds great, but if I was an institutional investor trading an asset class that comes with higher volatility and lower liquidity, I wouldn’t want to have to worry about the added variable of high latency and the possibility of trade slippage.
In comparison, the Wall Street-backed platforms are looking to host in the same locations as traditional finance, such as NY4 and LD4. Platforms can either partner with a dedicated bare metal hosting provider in these locations or co-locate. Whichever they choose, they will have infrastructure situated in close proximity to and within the same network as institutional investors, thereby benefiting from incredibly low latency to enable high frequency trading.
The encroachment of Wall Street into the crypto industry is certainly an exciting sea change for some institutional investors. It promises to provide the stability and security that the industry has been so lacking.
Overall, I believe that more institutional investors will look to use exchanges such as EDX backed by Charles Schwab, Citadel Securities and Virtu Financial, and Zodia Markets backed by Standard Chartered. But established crypto platforms such as Binance and Coinbase will always be the number one option for retail investors.
Trading expert Mike works with customers not just as a hosting provider but a partner to ensure their infrastructure enables future growth. A golf newbie, he's regularly one shot away from selling his clubs.
