DLT Markets AG, a Bank Frick subsidiary, is developing a crypto trading platform for institutional investors. It will have to address institutional investors’ key challenges: fragmented liquidity, poor technology, limited access to hedging tools, and lack of regulations.
Bank Frick will launch a trading platform for cryptocurrencies and digital assets, tailored to the needs of institutional investors. The bank announced on Wednesday it has established a subsidiary called DLT Markets AG, which will develop and operate the platform.
DLT Markets will provide its clients with multi-exchange access and the same regulatory standards of the traditional securities business. EU-regulated Bank Frick will act as central custodian and DLT Markets will administer order data and perform the risk and position management processes.
Responsible for DLT Markets will be Roger Wurzel, who spent 20 years at Deutsche Bank in equities and derivatives trading. “We are creating a unique market offering for institutional investors in the area of the new digital token asset class. With our fully regulated platform, we are driving professionalism with regard to the trading of digital tokens and cryptocurrencies,” says Wurzel.
Roger Wurzel joined Bank Frick last year and was at first involved in the bank’s business development activities. Now, he will take responsibility for DLT Markets as CEO. The business development of DLT Markets is headed by Markus Besler, most recently a blockchain project developer at Bank Frick.
Crypto adoption by institutional investors has been slow so far. Compared to retail investors, institutional investors face a different set of issues. The major challenge of DLT Markets will be to address the key pain points of institutional investors in crypto markets.
Fragmented liquidity and poor APIs
One issue for institutional crypto investors is fragmented liquidity. There are thousands of crypto exchanges, each having their own trading systems which are fundamentally different from each other. Thus, investors need to open accounts with different exchanges and maintain balances with all of them at the same time. That’s cumbersome to manage and inefficient.
In order to get the best execution results, traders use exchanges’ APIs to send orders to multiple exchanges. However, APIs provided by most exchanges are primitive and not compatible with industry standards. This is an issue DLT Markets will face when developing a multi-exchange access platform.
That said, the bigger exchanges have become more professional and offer more robust API services. DLT Markets will have to connect to a selection of prime exchanges, aggregate liquidity and distribute it to their clients.
Limited hedging tools
Another reason why institutional investors have so far shied away from cryptocurrencies is the enormous volatility in the market. That, in itself, is not a problem, but as the industry does not provide many cost-effective hedging options, investors have a hard time managing excess volatility.
Futures contracts or perpetual swaps, for example, are currently only available for a very limited range of cryptos. And shorting is very difficult because there is no effective mechanism for lending and borrowing digital currencies.
In traditional markets, Contracts For Difference (CFDs) are a popular hedging tool. A CFD is a contract between a buyer and a seller, where the seller will pay to the buyer only the difference between the current value of an asset and its value at contract time. If the difference is negative, then the buyer pays to the seller.
Some crypto exchanges have already started to offer CFDs on a number of popular crypto pairs, enabling investors to hedge their exposure by going long, short and trade on margins. If DLT markets can provide clients access to such cost-effective hedging tools, it will attract institutional money.
Lack of regulations
The third challenge for institutional investors is the lack of government regulations. Institutional investors mostly don’t trade with their own money. Thus, they have to follow more strict compliance standards than retail investors.
Most crypto exchanges are unregulated and function without oversight, which results in a lack of investor protection. Also, as many exchanges can’t even open a bank account, fiat on-ramp is expensive and sometimes not even possible.
As DLT Markets is a Bank Frick subsidiary, it will have to comply with EU financial market rules and regulations, providing institutional investors with legal certainty.
Institutional investors are in the starting gates
The influx of institutional money will give the crypto sector a major boost in terms of both, liquidity as well as reputation. Large institutional investors like Fidelity Investments have already signaled a commitment to the crypto space. A report in October revealed institutional investors had become the largest buyers of crypto transactions over $100,000.
But the infrastructure for institutional investors is still missing. Thus, projects like DLT Markets could move crypto markets one step closer to institutional adoption, if they succeed in addressing the key challenges.
“The establishment of DLT Markets represents a further step for Bank Frick in developing a future-oriented financial ecosystem and combines regulatory security with the benefits of blockchain banking,” reads Bank Frick’s press release.
Edi Wögerer, CEO of Bank Frick, says, “In establishing The DLT Markets AG, we are significantly building on our leading position in the area of regulated blockchain banking. With our spin-off, we are offering institutional clients a unique combination of a FinTech company and a bank regulated by the EU. The trading and safekeeping of digital assets thus go hand in hand – just like they do in the traditional securities business.”
Image: ©Bank Frick