Future of Finance


What cryptocurrency “prime brokerage” might and might not mean for digital asset markets

A Future of Finance Webinar on 9 February 2023 at 2pm UK time

Prime brokerage is a well-established and well-understood discipline in both the foreign exchange (FX) and the securities markets, in which buy- and sell-side traders use the reputation and balance sheet of an investment bank to trade with multiple counterparties, often on a leveraged basis. But as professional trading of the major cryptocurrencies soared in the cryptocurrency market boom of 2020-21, a growing number of service providers began to describe the services they provided to cryptocurrency traders as “prime brokerage.” Are they right to do so and, if they are, what does the advent of digital asset prime brokerage imply for the future development not just of the cryptocurrency markets but the tokenised asset markets as a whole?

What is the event about?

Despite their self-image, and disparaging characterisations by experienced bankers, cryptocurrency markets have assumed many of the properties of established financial markets. They have developed exchanges, brokers, market-makers, custodians, asset managers and credit. Also like traditional markets, it is retail investors that provide the money and professional traders that collect the profits.

In fact, it is the rise of trading that is the chief characteristic of cryptocurrency markets over the last ten years. Traders have shaped the evolution of the markets, linking sources of liquidity by summoning into being Layer 2 applications and Stablecoins, and adding credit and leverage, by providing a ready audience for cryptocurrency lending services and both listed and OTC cryptocurrency derivatives.

In traditional markets, traders and actively trading asset managers rely on prime brokers to clear and settle and custody their trades with multiple exchanges, brokers, market-makers, trading platforms and buy-side firms. So it is not surprising that a number of service providers in the cryptocurrency markets have appended the label of “prime brokerage” or “prime services” to their offerings. 

Whether all the aspirants truly provide prime brokerage services is questionable. But it is clear that the key foundation of a prime brokerage service – namely, the clearing and settlement of trades at multiple venues through a single entity which makes margin loans against assets in custody – is now available from a variety of exchanges, platforms, digital asset custodians and technology vendors.

This is injecting a range of risks into the cryptocurrency markets. Credit is being manufactured but the use of collateral is patchy, multi-lateral netting is unknown, and many trades are proceeding on the basis of unsecured credit lines.  Customer assets are being held on intermediary balance sheets. Even basic record-keeping, as the unfolding catastrophe at FTX has made clear, is sometimes absent. 

The service providers offer a variety of solutions to these difficulties, including closed networks of approved exchanges, custodians and counterparties; tokenisation (or delegation) of assets-in-custody on to permissioned blockchain infrastructures rather than risk delivering underlying assets free of payment; independent custody; and trade tracking and reporting tools.  

Through the summer of 2022, these risks came to life, as the inadequately collateralised liabilities of a failed cryptocurrency hedge fund had knock-on effects on thinly capitalised cryptocurrency brokers, trading platforms and exchanges. These events had less effect on trading volumes and institutional appetite for cryptocurrency risk than expected – and even vindicated some prime brokerage models.

The question is whether those models are adequate to satisfy the demands of both institutional money (which prioritises the financial strength to make it whole if something goes wrong) and regulators (which prioritise investor protection and financial stability) or whether they need to be bolstered by sophisticated netting and collateral management technologies and (above all) capital.

This webinar will assess the current state of trading in the cryptocurrency markets, examine the risks current practices are running, explore how different types of prime brokerage services look to mitigate and manage those risks, and ask which of regulation, institutional investment and capital infusion is most likely to be decisive in determining whether digital asset prime brokerage waxes or wanes.

To read more about this subject, visit the accompanying article “What the future might hold for cryptocurrency prime brokerage” here. 

When is it being held?

Thursday 9 February 2023 at 14.00 London time 

Where is it being held?

As a webinar on Zoom.

Why attend?

Cryptocurrency prime brokerage is pioneering a service that will be crucial to the success of the tokenisation of securities, commodities and funds. If it fails to develop successfully on the limited scale of the cryptocurrency markets or leads to failures which cause further losses to investors, it will damage the chances of using digital technology to revitalise the securities, derivatives, funds and commodities markets. For asset managers, brokers, trading platforms and exchanges involved in the cryptocurrency markets already, the success or failure of prime brokerage is a potentially existential issue. For traditional asset managers, investment banks and custodian banks, and especially regulators, it is an issue they need to understand and monitor closely. 

What topics will be discussed?

  1. What is the current state of cryptocurrency trading in terms of volume and value?
  2. Have recent events in the cryptocurrency markets reduced or deterred a significant amount of activity?
  3. What risks are created by cryptocurrency trading?
  4. How big a problem is the short-term credit created by prime brokers?
  5. How much longer-term leverage are cryptocurrency traders assuming?
  6. How are cryptocurrency trading risks being mitigated and managed?
  7. Is collateralisation being used effectively as a risk mitigant in cryptocurrency trading?
  8. Would netting of trades and margin payments increase or decrease the risks?
  9. Is the term “prime brokerage” being used correctly in the cryptocurrency markets?
  10. Are cryptocurrency prime brokerage services anything more than a reflection of fragmented liquidity?
  11. Does the emergence of cryptocurrency prime brokerage services presage the development of excessive leverage in the cryptocurrency markets? 
  12. What sort of business (exchange, platform, broker, custodian) is a suitable parent for a cryptocurrency prime brokerage business?
  13. Is custody a good foundation for a prime brokerage service?
  14. Are closed networks of liquidity venues and custodians a stop-gap or a permanent solution?
  15. What problems does tokenisation or delegation of assets in custody solve?
  16. How important is it for prime brokers to help clients avoid the costs of being fully funded?
  17. Would regulation help or hinder cryptocurrency prime brokerage?
  18. What form might cryptocurrency prime brokerage regulation take?
  19. Does cryptocurrency prime brokerage need more capital and, if so, where might it come from?
  20. Is the future of cryptocurrency prime brokerage likely to be centralised, decentralised or a hybrid of both centralisation and decentralisation?

The panel

Chris Caruso, President, Pangaea Business Solutions https://www.linkedin.com/in/chris-caruso-7840196/

Rosario Ingargiola, CEO at Bosonic https://www.linkedin.com/in/rmingargiola/

Anton Golub, Advisor at the Swiss Crypto Alliance https://www.linkedin.com/in/antongolub/

Benjamin Stani, Director of Business Development at Matrixport https://www.linkedin.com/in/benjaminstani/

What do I need to do?

Look in your Inbox for our invitation to this event. If you wish to accept it, e-mail Wendy Gallagher at  wendy.gallagher@futureoffinancebiz