Insight Category: Highlights

How do you lay the foundation for fully digital capital markets? How far has work actually come in integrating a central bank digital currency into efforts towards tokenization?

And how is Switzerland pushing the industry forward in the next evolution of financial markets?

In Part 2 of this RULEMATCH Spot On episode, Ian Simpson and David Newns, Head of the SIX Digital Exchange (SDX) discuss the different ways that Switzerland has played a leading role in the development of the digital assets industry globally – with the support of the Swiss National Bank and others and with close input from FINMA.

 

 

Episode show notes:

(1:57) – Project Helvetia and why “equivalence” is a victory for Switzerland

(5:59) – The evolution of banks’ capabilities with digital assets

(9:24) – How banks are opening their minds to new use cases

(10:38) – Growth in number of member banks on SDX

(11:50) – Banks building or offering custody services for digital assets

(13:02) – Details on custody setup on SDX

(14:12) – The chicken-egg topic of dealing with crypto and digital assets

(16:13) – Looking at SDX’s crypto custody and repo services

(17:26) – How custody will enable crypto collateral mobilization from banks on SDX

(20:49) – Why collateral and lending with digital assets is critical in capital markets

(21:59) – Regulatory advancements (in Europe and Switzerland) and their implications

(23:51) – The significance of USDC/EURC MiCA approval

(24:42) – The challenges of DLT securities in Switzerland

(27:57) – Switzerland’s “central” role in global CBDC projects

(33:07) – Why Switzerland is still “winning the digital assets race”

(35:34) – A “sea change” in digital assets moving things forward

 

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Episode transcript:

 

Ian:

But Switzerland is still winning the race…

 

David:

So despite all of this, so also clearly everyone is carrying out POCs and experiments.

And then the ECB has three experiments around this as well.

 

Ian:

But nobody has built exactly what we have built in Switzerland.

David:

As far as a Western developed economy, there’s nowhere else in the world where you have security transactions in wholesale CBDC, where in a production environment you have the central bank issuing tokenized central bank money.

And the fact that they’ve now made that statement that this will…they’ll continue to support this and issue central bank money on chain in two years, expand the scope, include more members…

That’s a huge statement.

 

 

START OF FULL EPISODE:

 

Ian:

I’m your host Ian Simpson and today we bring you the second instalment of my conversation with David Newns, who is the Head of the SIX Digital Exchange (SDX).

In Part 1, we discussed the development of SDX and its focus on digital securities and some of the “under the hood” aspects of SDX, including its distributed central securities depository and the trade-offs between “precision settlement” and post-trade settlement with netting as well as the need for proper regulation and a riskless payment currency for wholesale settlement between banks.

In Part 2, we discuss the ongoing development of SDX and wider topics and developments in Switzerland and beyond, with the involvement of SDX, the Swiss National Bank and many other players.

 

David:

So here in Switzerland, there’s been a multi-year project, five-year plus now, called Helvetia, which has been the SNB’s initiative to explore this whole concept of tokenized central bank money.

So having issuing central bank cash on chain with Helvetia 1, looked at, technologically was it feasible?

And that was a BIS, SDX, SNB initiative.

Helvetia 2 involved a swathe of market participants, large and small banks. And then that proved out that operationally and from a regulated perspective and from the perspective of integration into core banking systems, so actually watching the flows- go all the way through from tokens being issued to settlement occurring and being recorded in banks, internal systems.

You could achieve that with central bank digital currency.

And then Helvetia 3, which was a landmark in capital markets globally, was the first time that central bank money was ever issued on chain in a production environment for the purposes of settling transactions.

We have now settled over 700 million francs worth of transactions on SDX in wholesale central bank digital currency, which that in and of itself is, it puts Switzerland at the very forefront of the adoption of digital assets on a global basis. So that level of innovation is really quite staggering.

And it doesn’t stop there because two weeks or so ago the central bank announced that they were going to prolong the support on the CBDC on SDX for a minimum of two years with a mechanism for rolling that on forwards and that they will expand the participants to anybody who is eligible for an interbank clearing account at the SNB and is a member of SDX and in addition over time increase the scope of functionality so we can address all the other pieces.

Because what we have now is rather limited in scope in terms of what we can do with the CBDC to all the other kinds of operations that get conducted in CBDC and capital markets on FMI.

So that, actually, kind of catapults Switzerland not just to sort of stay at the forefront, but it’s a huge leap forward.

And there really is no other developed Western economy that stands at that point in the adoption of digital assets.

And if I go back to that structure that we’re putting together, where we have this, the right regulation, a regulated blockchain, we have interoperability with the traditional infrastructure, we have a network of member banks on that platform who are carrying out activities.

The sort of the third leg to a stool was going to be the riskless settlement asset being available on chain, so that you now built up this infrastructure – this architecture which is going to be strong and stable enough to be able to then facilitate the use cases that we are all excited about.

So we’ve now achieved equivalence.

Hooray.

So with all those pieces in place, you absolutely can do everything that you can do on traditional infrastructure, but now using blockchain and tokenized instruments.

Again, nowhere else in the world has this been achieved except for here in Switzerland.

And I think that the Swiss financial center should be appropriately proud and also excited about this opportunity that it’s availed itself of.

It really will, I think, ultimately be a massive differentiation for the Swiss financial center when it comes to its place in the world.

 

Ian:

Going back to a topic that I wanted to come to earlier with the members on SDX and working with this infrastructure, obviously they’ve given lots of input in how it’s built, but then they themselves have also needed to build up their capabilities to interact with this, to be able to read this decentralized CSD, and then also to work with custody, right?

How has that process gone and where are members and maybe banks more generally in adapting and getting ready for this next digitalization wave?

 

David:

So, it’s a very interesting question because it also has to an observation that this is, or an implication that this actually is a heavy lift.

And I would say that it is a heavy lift. We’re talking about a whole set of new technologies a bank is not familiar with.

Now, if I look at the first part, the first members we had of SDX, so our pioneers, UBS, ZKB and Credit Suisse, who came on board back in 2021.

Obviously, at that point, but we’re both learning and typically, this was their first experience of any interaction around blockchain technology being used in this particular way because we’re kind of unique in the world and still to a great extent are.

So that hasn’t changed a vast amount.

What you need to do as a member when it comes to accommodating this technology is ensure that all of your business support functions get comfortable with it.

And that is quite a significant lift.

So from a risk and legal…and compliance and technology perspective, you need to have these guys get comfortable, adjust or accommodate digital assets, tokenization, blockchain technology, cryptographically secured assets, management of private keys, all of that needs to be, and then integration into the core banking system.

These are all massive lifts, but either in terms of people or technology.

They all need to work to accommodate this technology into their control environment and technology environment and so on.

So one of the reasons why it takes us quite a long time to onboard a member is because the workshops we need to carry out with representatives from these firms are pretty extensive and very involved.

Because this is the first time that they’ve encountered this very frequent, very often, that’s first time they’ve encountered this sort of thing.

What you end up with afterwards is now you have enabled the capacity within that member, within that bank, for them to take that learning and that understanding and that technology and apply it to other contexts outside of SDX and SIX.

So I think that it’s an incredibly beneficial exercise.

For us, on the one hand, we were very concerned that clearly this is a big lift for a bank to start talking to actually get their hands around this.

What we didn’t understand, and the feedback we got from the banks was what a valuable lesson that actually is for them because it gives them this massive expansion of capability and understanding and capacities within their organization that they can apply to other contexts.

It’s another way that we – that SDX and Six Group – has played a role within the Swiss financial center is issuing digital bonds.

And I don’t really think that we’ll even…

We’ll stop marketing the fact that we have issuances of digital bonds when they happen anymore because it’s becoming par for the course. When you stop talking about it, it is a massive day, I think, because it’s become commonplace.

And that’s really because the members, the community here has reached a degree of sophistication and understanding that this has become something which is every day for them.

That is not the case in other jurisdictions.

And I think that capability can be, as I said, can be transferred to other contexts and it’s a capacity that is going to benefit the entire Swiss financial centre because now we’ve moved to, that was three banks back then, we more than tripled our membership last year.

So we ended last year with 13 members.

We should at least double it again this year.

And that will also include bringing on our first US banks, more international members.

We…Commerzbank was the first international member that we onboarded at the end of last year. We also…and they were also the issuer agent for the World Bank bond.

So we’ve really kind of crossed a- I think – a chasm in terms of the number of, and the kind of members that we’re now onboarding to the platform.

But if you look down the list of banks in Switzerland, all the top banks are now onboarded onto SDX and then the next tier and probably the next tier as well.

That again represents a capability in the regulated capital market space in Switzerland that hitherto was only within the non-regulated sort of “Crypto Valley context.”

That’s where that understanding, now that understanding has spread to the regulated sector as well, which I think is a huge benefit for Switzerland.

 

Ian:

When we talk just about custody, that was one question that came up in my mind. banks always face that “build or buy” kind of conundrum, right?

And yeah, it takes a long time to build up the internal processes and understanding of things. Then when it comes to custody and handling, there’s many companies working in the cryptocurrency custody space, some also working in the tokenized securities space and in some cases those capabilities cross over.

Do you think banks will outsource some of that capability to other companies? Will some of those banks turn their capabilities into a service for other banks?

How do you think about it?

 

David:

I think all of the above, yeah. I think it depends on the organization and its appetite for providing different kinds of service. And it’s history.

I mean, it could well be that it builds up a competence and gets excited about actually pursuing commercial activities represented by digital asset custody.

In the context of SDX, the wallet infrastructure is integrated into the nodes that they run so that they simultaneously host the nodes, they run the nodes – also manage the wallets, they manage the private keys in the wallets.

That’s actually a requirement of our members.

They do not outsource back to us, for instance, because legally they have to manage their own private keys.

So far, as far as I’m aware, none of them have outsourced that service to, that requirement to a third party.

Now, in the future, when we’re talking about digital assets more broadly and including custodying of security tokens or governance tokens of cryptocurrencies in that context aware these tokens are from they represent holdings on public chains and there are now third-party custody platforms that you could potentially leverage that or third -party custodians that you could use your sub custody and so on.

I think that yes, it’ll be a variety of different approaches will be taken by banks as to whether they choose to outsource or insource that activity.

 

Ian:

So, some people have said, and you talked about it a little bit earlier, there’s a lot of innovation happening in the crypto space, and then you learn from that and apply the lessons.

Some people have said, well, those who maybe offer cryptocurrencies and trade cryptocurrencies today will be some of the first that move into tokenized securities in a more regulated capital markets standpoint.

Do you think that’s fair to say or is it not necessarily the case or is there going to be learnings that some banks take from here and apply here or not necessarily?

 

David:

I think that it’s certainly very helpful to have the experience, mentioned before, of what it means to leverage this technology in the context of SDX and digital securities.

That will certainly, I think, put you into a more comfortable position because you have expertise in-house about that.

To your point about custody as well in this context, I can see that in the short term, certainly the demand for using third-party custodians is going to be extremely high.

Because even though we need you to do custody of your private keys and so on for digital securities, the complexity of running custody for a multiplicity of coins, that gets really significant really quickly because they’re all a bit different and they all have different requirements, especially when it comes to coins that have governance processes built into them where you expect to vote on certain matters associated with the chain and how you do, you need to do that by the custody platform.

There’s a lot of changes that need to be accommodated to actually facilitate that.

If your customers are asking for new coins and the processes that you need to go through can be very heavy in terms of determining whether you should include that, which is one of the reasons why…

So we do provide crypto custody-as-a-service to our members as well outside of our FMI structure.

So if I move and look at our cryptocurrency offering specifically, that is very much orientated around a custody offering.

And there’s two areas I think are really interesting.

One is this getting your hands around “crypto custody” is a challenge for an organization.

So here is an institutional grade custody solution built on top of Fireblocks.

It’s a hybrid solution in that we also – we manage the operations related to the private keys on that platform, which sets it apart from other providers of custody where those private key operations are still managed on cloud very frequently rather than on-prem on technology that we actually own and operate ourselves as SIX Group, which is much more akin in many ways to us managing the enormous vault that we keep real gold in, right?

We’re good at looking after things that are incredibly valuable, where processes and controls are absolutely critical.

So we have that as a service, but also historically since the CSD is also essentially a custody platform.

The need that we see based upon how we see the CSD being used for, as we mentioned before about collateral mobility – the CSD on the traditional infrastructure has innumerable sets of different kinds of services.

But one of them is the “tripartite repo service” where you as a customer manage the collateral frequently that you have under custody at SIX SIS to manage credit lines with other platforms.

Now, with platforms that you then trade on – in the context of some of our customers, the collateral that is being deposited is collateral from their customers.

They want to be able to keep an eye on the collateral that their customers are depositing with them, so they can then extend credit lines to those customers, enable them to trade on third -party platforms.

In the context of crypto, those third-party platforms are typically crypto exchanges.

And in the context of crypto, the customers of that, of the consumer of that service, the collateral management service, those customers are frequently crypto natives.

And oddly enough, a lot of their collateral is digital, not securities.

So you have the situation where this is a facility which traditionally we’ve been doing for years in the traditional world of helping customers manage collateral to extend credit lines.

But in this context of crypto, where credit lines are everything when it comes to transacting on platforms, if that collateral is digital, then you might have a challenge.

But because SDX has a crypto custody platform, we can take in that crypto custody and immobilize it on our custody platform, represent that collateral inside SIS’s existing collateral cockpit so that within one view, a customer, market participant, can see collateral – whether it is traditional securities or crypto – and manage that effectively to ensure that they completely comfortable and managing credit lines in the most effective way possible in that tripartite repo context to enable the maximum credit lines to be enabled between their customer and that trading platform.

So that another example of interoperability and I think something that’s just kind of rather unique in this space and something where an FMI can play a really interesting role because it’s extending its traditional role again into new markets in this case into crypto because of its ability to provide regulated trusted infrastructure from a party which traditionally has done this as their bread and butter.

 

Ian:

Interesting. I could see that being a very interesting development in the space. Again something not so, shall we say, sexy as far as innovation, something in the capital markets that is very, very…

 

David:

In capital markets, this facility drives capital markets.

I mean, your ability to manage credit lines so that you can actually trade in the first place is absolutely critical.

You do that by posting collateral. If you can only post a subset of the collateral that you have available to you because half of it is, or more of it, is crypto, then that’s inefficient. Whereas if you can also include crypto in that, we extend the ability to provide that to do external credit line.

More trading can occur in that context of regulation of safety, specifically everything that the institutional world requires to conduct these activities.

 

Ian:

Then we could imagine even more crypto foundations, people with these kinds of assets, high net worth individuals and so on, flock into Switzerland and take an advantage of this.

 

David:

Exactly, because we know that again some of those foundations now manage, they hold both crypto and traditional securities in their portfolios so they can again leverage that entire set of instruments for the purposes of activity trading.

 

Ian:

Let’s go back to the topic of regulation, not to go too deep and heavy into it. MiCA just came online, so to say, in the last week or so, but before we get there.

There’s also been some advancements in Swiss DLT law in the last few years.

What do you think about that and how would that apply or not apply to what SDX is doing or wants to do in the future?

 

David:

So those two bits of regulation are interesting.

I think MiCA going live very recently – in terms of coming into law – that I think is of enormous significance.

The fact that you now have the world’s second largest economy with effective, sensible (for the most part) regulation around crypto assets.

And again, specifically, it’s crypto.

It isn’t digital securities.

There, there’s still a little bit of a hole in terms of cross-jurisdictional regulation.

Or basically, there isn’t any cross-jurisdictional regulation in the EU that covers digital securities, which is an interesting fact in and of itself.

And what we’re going to see is, again, that’s a catalyst to adoption and to the institutional space when it comes to participating in the crypto universe, as it were, with that as an asset class.

So it’s, again, different to leveraging blockchain to add efficiencies and open new capabilities within the existing capital markets.

It’s like it’s a new economy as it were.

It’s like encountering a new country and then being able to actually invest in that country’s economy.

And the things I find exciting this year have been, yes, MiCA.

And a good example of something that’s already happened, which is I think again, a sort of a milestone is the fact that Circle – for USDC and EURC – was granted a license, an e-money operator license earlier this week.

So congratulations to Jeremy, Dante and team for achieving that world first.

I think that’s really significant.

I think as significant as Switzerland actually extending its CBDC – essentially on a path to full production.

And that will act as a catalyst, I think, for broader adoption because once you have that sort of regulatory certainty then you can build on that.

 

Ian:

And regarding the Swiss regulation, there’s a DLT securities…

 

David:

So I think really innovative…

The challenge that we have with DLT securities and I think that’s one of the reasons why the market isn’t sort of swinging over to DLT securities like any pace, is that?

It doesn’t really address the sort of the UX issues as people refer to them.

One of the benefits, and I’ve got to go back to this notion of interoperability…

If, as an investor, to hold a kind of an instrument requires that you accommodate, embrace, implement an entirely new kind of infrastructure.

And here we’re talking about wallets and connecting those wallets to public chains and then managing your private keys in those wallets.

As an institutional investor, that is an enormous lift and something that at the moment is not easily facilitated by your custodians, except for in a small number of cases.

I think in the future that will change as custody platforms either get provided by third parties such as ourselves to banks or the banks themselves ultimately roll out their own custody platforms to make the process of holding those securities more seamless to the underlying investor.

Because what you don’t want to do is just make it more difficult and add risk to that underlying investor’s world.

They want to focus on what they’re good at, which is determining what assets they want to hold in their portfolios and managing those assets as effectively as possible.

They don’t want to be worrying about implementing and managing wallets and keys.

Digital securities being natively digital on public chain are a bit challenging to consume at this point in time.

That’s the intermediated securities that are more traditional, the way that right now the majority of value that’s represented in terms of digital securities is being held, has been issued and being held in Switzerland.

But I do think it’s really interesting step forward.

There is some questions around how as an institutional client, you might hold that.

I see that being a bit problematic in terms of the DLT security is meant, it should be considered a security under the law, but it’s a bit in contradiction to the BIS’s treatment of crypto assets, which says that permissionless tokens are crypto assets and again, and should be treated essentially the same as a cryptocurrency like Bitcoin.

So as a bank holding that asset on your balance sheet will incur a 1250% capital charge, which makes it very uninteresting as an instrument to hold on your balance sheet.

 

Ian:

That’s a topic we’ve covered with a couple of guests already, the capital requirements. I think it’s not going to go away and hasn’t quite gotten cleared up or solved in that sense.

Let’s, as we move towards the end of the session, just talk about in the general context, and you talked about it before, Switzerland being very much at the forefront and everything that you’ve built at SDX really set in the standard very high for the rest of the world.

I had a conversation briefly with Thomas Moser from the SNB just about how other central banks look to the SNB to be involved in these bigger, broader global projects, which I think he and they are quite proud of.

Is there really mobilization based on what you’ve done at SDX to replicate this and build interoperability across jurisdictions and other places? And how is Switzerland positioned in that?

 

David:

98% of central banks around the world, according to that WEF study, the report that came out in April, which I thought was really good, by the way – and not just because we were heavily involved in being asked lots of questions about that on a wholesale CBDCs.

So 98% of the world’s central banks are conducting experiments in central bank digital currencies.

For all the reasons I mentioned earlier.

I mean, it’s that whole, if the world goes tokenized, they need to have something that is tokenized central bank money for all these reasons. there are other use cases.

But essentially, what we’re seeing as well is a wholesale CBDC is really being focused on I think more and more this year.

It feels that the whole retail CBDC thing is kind of dying away a bit especially for developed Western economies the eurozone. it is a bit different. I think they’re still pursuing digital euro with some degree of, asort of tenacity

But with this if you look at the plethora of CBDC projects that exist around the world today – it’s really, really remarkable.

So we have not only, again, that almost every central bank in the world is doing some sort of experimentation or pilot or POC in CBDC, but you have these super national initiatives that have either ones that have been going on for quite some time or that have been recently announced.

Here in Switzerland we have, we did some pretty substantial super national activities already.

So we did Project Jura, which was between the central bank, between the Swiss National Bank and the Banque de France conducting wholesale cross border payments in CBDC – again, leveraging the SDX platform to facilitate that.

There’s been Project mBridge in which is another BIS initiative which is CBDC cross border between the UAE and HKMA and China.

Recently Saudi Arabia joined that initiative.

There’s some enormous number of observers as well to that.  I think Thailand is involved as well.

Then more recently Project Agora, which is the BIS’s most recent initiative in the space, which is the seven central banks that represent the largest currencies by trading volume in the world.

They have all signed up to this initiative to do cross-border payments, this concept of the unified ledger that the BIS has previously talked about.

In Singapore with the MAS announced in November of last year at Singapore Fintech Festival, the Global Layer One Initiative, which is also really interesting.

I the G3 are involved in that. JP Morgan is involved.

And then there are private initiatives like Partior, which is a cross -border platform that is, again, JP/ Temasek backed initiative out of Singapore.

Then there’s the, I have two more, the Regulated Liability Network, which is Citibank’s initiative, Tony McLaughlin sort of being the godfather of that over in their digital asset department.

And the US equivalent again backed by Citibank, but with a host of other banks involved called the Regulated Settlement Network…same thing, different name.

And then Canton, this recently announced layer one, which is public permission blockchain, has many of features that look like it can also facilitate exactly the same use cases, but coming entirely from the private sector, but with this notion of a governance structure that makes sense in this particular context.

 

Ian:

And Switzerland is still winning the race, despite…

 

David:

So despite all of this, so also clearly everyone is carrying out POCs and experiments.

And then the ECB has three experiments around this as well.

 

Ian:

But nobody has built exactly what we have built in Switzerland.

 

David:

As far as a Western developed economy, there’s nowhere else in the world where you have security transactions in wholesale CBDC, where in a production environment you have the central bank issuing tokenized central bank money.

And the fact that they’ve now made that statement that this will…they’ll continue to support this and issue central bank money on chain in two years, expand the scope, include more members…

That’s a huge statement.

And actually, not just means that Switzerland stands at the front, but I believe that that really pushes us ahead.

And it’s something which is hard to replicate. just because we’ve achieved so much and we’ve built so much already.

But the structure in Switzerland between the Swiss National Bank, as mentioned earlier, this mutualized infrastructure, which is member-owned, the relationship between SIX and the SNB, I think that’s a private-public partnership, already entails our support for the RTGS platform that the SNB operates, the repo platform the SNB operates, and also having a regulator such as FINMA and having informed individuals over there.

I think we have regular constructed dialogues with the likes of Matthias Olbrecht on the FinTech Desk there, really informed individuals who are themselves, I think, pioneers in this field.

The individuals and as well as the organizations that they work for, that capacity, that capability, and that pioneering perspective and that awareness to maintain our edge as a center of financial services that provide the most innovative but also the most safe and secure and trusted services in the world as Switzerland…

That does require that we are pioneers in this new space and we are pushing forward to these new horizons.

And it’s very, very satisfying to see that demonstrably that is the case.

 

Ian:

Definitely. definitely.

We have one question left. We ask every guest that comes on the podcast.

Is there something both at SDX or more broadly in the market that is happening that people aren’t talking about, that you can think of, maybe give us a hint to watch out for in the next 6, 9, 12 months.

Something that will be very interesting to see develop.

 

David:

Well, I talked about how it feels like there’s been this sea change and the visible manifestations of that, think, are Circle being granted an e-money license in Europe – the largest economy in the world, largest market in the world, now regulated through MiCA.

The CBDC initiatives here in Switzerland, these are visible indicators of something that’s happening.

What we’re feeling at SDX as a result of the momentum that we’ve seen following the announcements and the background, sort of the tailwinds from the adoption of assets more broadly, but also the support of our stakeholders such as the SNB and our members.

The flurry of new onboardings we’re having at the moment, what we’re seeing different about the conversations we’re having now is that our members are bringing us use cases that they want to actually leverage our blockchain to deploy, to actually further their own digital ambitions.

So it’s no longer the case that we are trying to persuade people that there’s something special about blockchain and that now “Why is a digital bond better than a traditional bond?”

That conversation has changed to “I see that you have digital bonds available on-chain, you have a central bank digital currency available on-chain within the context ofwhat you can provide to the market I want to be able to facilitate these use cases, I have this requirement for you guys to actually do, to actually enable me to take advantage of…”

And they are around collateral mobility and fractionalization.

So being able to hold fractions of assets in customer accounts, which we can do.

So our CSD has unlimited capacity for sub-accounts, numbers of sub-accounts on the ledger.

Instruments that previously have been too lumpy, so the minimum size to hold has been too large, those can be fractionalized on our blockchain, on a piece of mutualized infrastructure – and then provided into and then held at the sub-account level so that you can actually enable new instruments to be held by customers – which as an asset manager previously you couldn’t do.

Again, then following on from that, there’s a whole bunch of other use cases that come out of that as well around programmability.

So you can then manage the distribution of assets held in a portfolio based upon a number of parameters which you can program onto the blockchain which will then automatically manage the holdings, these fractions and then the programmability.

They begin to see how the natively inherent functions of the blockchain are being exploited by our new members who are coming on board.

And I believe in the next six to twelve months, we’ll begin to see production implementations and examples of totally new innovative solutions being provided to ultimately the underlying investor.

And that also comes in a cost-effective fashion.

So we believe that that is where you really begin to see the benefits of all this building work that’s been done.

You’ll begin to see that superstructure of the skyscraper in all its gleaming glory begin to sort of appear having done all this hard work of building the foundations.

That’s been carried out over the last five, six years here in Switzerland.

 

Ian:

Super – very, very interesting. We’ll be looking for that.

David Newns, thank you very much.

 

 

Consistent liquidity in crypto markets has never been more important than now. With the shift away from purely retail-driven buying and selling, market makers take on an even more essential role.

But as new financial products with crypto underlyings come to market – and market structures and trading models evolve, how the dynamics change? Will RFQ models and CLOBs exist in parallel? How will opening and closing times in TradFi influence market movements?

RULEMATCH Spot On host Ian Simpson welcomes Flow Traders Global Head of Digital Assets Michael Lie to the podcast to discuss all this – and more.

 

 

Episode show notes:

(:47) – Intro and crypto history at Flow Traders

(4:59) – Understanding market making

(6:35) – Crypto and TradFi market making compared

(7:40) – Evaluating the risks and opportunities in a new market like crypto

(10:05) – Mitigating counterparty credit risk with exchanges

(14:42) – Adapting to a lack of post-trade settlement and low latency infrastructure in crypto markets

(19:17) – HFT activity in crypto – past and future

(20:45) – How Flow Traders makes a market across different crypto market models

(25:50) – Transparency for institutional players in crypto markets

(27:42) – Advantages of post-trade over atomic settlement

(30:13) – The particulars of price discovery in crypto

(31:49) -Regulation and the development of spreads in crypto markets

(34:39) – MiCA, stablecoins and the euro stablecoin project of Flow Traders

(43:09) – A look back at spot BTC ETF launch in the US

(46:25) – Thoughts on an ETH ETF

 

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Episode transcript:

 

Michael:

Well, yeah, I would say that most large trading companies have joined this space already.

But now that, for instance, you see the low -latency exchanges, like also RULEMATCH has a very high -performance technology stack.

Of course, this becomes more important – that people have not just the knowledge, but also the network behind it to be able to compete at that level.

 

BEGINNING OF FULL EPISODE:

 

Ian:

Hello and welcome to another episode of RULEMATCH Spot On, the only podcast focused exclusively on the institutional crypto and digital assets industry.

I’m your host Ian Simpson. And if you want to know what banks, hedge funds, market makers asset managers and other institutions are doing in crypto and how they’re doing it – this is the place for you.

My guest today is Michael Lee. He is the Global Head of Digital Assets at Flow Traders .

Flow Traders , as most people would know, is one of the leading trading firms and market makers across various asset classes, also in crypto and digital assets.

And again, Flow Traders , one of our partners at RULEMATCH, is one of the designated and regulated market makers on the trading venue.

Of course, good to mention that nothing which you hear today is financial advice or an offering of any kind.

Michael, welcome to RULEMATCH Spot On.

 

Michael:

Thank you, Ian. Looking forward to discussing the crypto markets from a market maker perspective.

 

Ian:

So let’s start today with some high level questions, kind of background a little bit.

At Flow Traders, you are an experienced market participant, market maker, trading house, liquidity provider across different TradFi asset classes, and also now crypto and digital assets.

I’d be interested to know a little bit of the backstory, some of the flavor of how Flow Traders  decided to get into the crypto space. Can you tell us about that?

 

Michael:

Yeah, so Flow Traders has always been at the forefront of market making and actually already quite some time before we officially ventured into crypto.

We had people being active on exchanges like Mt. Gox on their personal account. So that got us a little bit of first-hand experience. And since then we were following the market.

So similar to how we expanded into other asset classes like fixed income, precious metals, we also saw an opportunity within the crypto markets that there was also potential for institutional interest.

So I think it was a combination of the entrepreneurship within the company, our experience in market making, but then also very importantly, the vision that we had around crypto, that it was an asset class that could grow and had a potential to get institutional interest.

And that’s why we decided to join.

 

Ian:

Was there something particularly about crypto that appealed to you? I can imagine maybe the volatility is an interesting aspect from a market making perspective?

 

Michael:

Yeah, that was definitely an interesting one and one experience that we learned very early on. Also prior to joining the crypto business, I was actually on the European ETF desk.

So I remember well when Brexit happened.

And this was an event that we had been preparing for weeks in advance for a scenario where actually a Brexit would happen.

On that day that it happened, we saw a lot of panic and chaos in the market. It was kind of unexpected.

And we saw asset classes moving more than 20% down. So because of our experience in market making, as well as the preparation displayed well into our hands. for me, it was one of the most memorable, rewarding days.

Then when we looked at the crypto markets, this is what we saw happening on a much higher frequency.

So we actually started in 2017 and it was myself starting out in Excel programming to the exchanges. And soon after, the CME announced they would be launching Bitcoin futures.

 

And we saw a similar type of volatility again.

So the experience that we had from Brexit and other events from our traditional finance experience really helped us then be able to handle such a scenario at a good pace.

 

Ian:

Interesting. Very, very interesting. Just looking at what you do at Flow Traders , I guess people understand the term market making, or at least they think they do, but we also know there are different flavors, different approaches, different strategies.

Without giving away any house secrets, can you just tell us, generally speaking, how Flow Traders  positions itself in the market making space and some of the ways you approach to doing that job?

 

Michael:

Yeah. So when we talk about market making, what we mean is that we are providing liquidity in the order book. So we are in with a bid and an order. And that allows for investors to exit and enter positions in an efficient way with little slippage and tight spreads.

So that’s how we see the role as a market maker. Then when you look into crypto, I think the role of a market maker is even more important because of the state where it’s in – the state at which projects get listed.

Comparing with an equity IPO, the company is typically well established. But for crypto, they launch at such an early stage that they get listed once a chain becomes live.

And the role of a market maker and for there to be liquidity allows, for instance, decentralization, which is important for the platform to be functioning.

So we approach market making similar for any other asset class, but I do think that with crypto, the role of a market maker is even more important.

 

Ian:

So you wouldn’t say there’s any great differences to how you approach, say the traditional ETF business or ETP business to market making in crypto assets?

 

Michael:

I would say we trade based on the same principles, the same trading principles. There are exchanges and an exchange in ETFs or an exchange for crypto, they function the same.

But our approach for each of the asset classes are different.

When talking about crypto, we need to be is to be very adaptable to changing circumstances.

Then you talk about regulation, about the technology, about the credit risk of the counterparties that we face. This has changed over time – again and again in all of these areas.

So our approach, I would say, there is more being adaptable to changing market conditions compared to other asset classes.

 

Ian:

So more flexibility is definitely a key in crypto, I can understand that.

Just going back to the historical part before we dive down into some more details, I can imagine as a regulated company with Flow Traders  being a listed company based in Holland but active globally, it would be a big decision to decide to really move into the space, into crypto and digital assets.

What were some of the evaluation criteria or some of the things that you said, now we need to make sure about this, we need to make sure about this and this. Can you high level go back to when you made that decision to start and give us some of the background?

 

Michael:

Yes, so high level, we identified three key challenges when entering this space. First one was technology, it’s a cloud technology, which is quite different than what we were used.

The second one was the credit risk that we would be exposed to when trading on the crypto exchanges versus more regulated exchange.

There is a large risk.

And I would say maybe the biggest challenge for us to make the decision was the regulatory risk.

Whereas when we entered, there was no regulation at all around digital assets and all the platforms that we would be trading on were unregulated.

So what we did is we proactively went to our regulator and we basically explained the current market structure – what our intention was to do in the market, basically providing markets, being the market maker in a market that is very volatile, but maybe not having the liquidity yet.

We definitely saw a need for us to enter that space from both a liquidity perspective, but also the perspective of maturing the asset class with our experience from trading regulated asset classes like ETFs and equities.

 

Ian:

Okay. So on some of those buckets, I think maybe we could dive down into a little bit more and also think about how it’s developed since you started up until now

As you said, you have to be very flexible to stay up with crypto market developments.

Let’s start maybe with, with counterparty risk or credit risk. That’s something that maybe people don’t talk about in the retail space too much, but of course is critical for institutions.

How do you, as a market maker, try to mitigate that risk?

What are some of the approaches you take to mitigate in the counterparty credit risk?

 

Michael:

Yeah, so maybe first to understand why are there larger risks. There is a big difference in market infrastructure for traditional exchanges and crypto exchanges. So when we would be trading and market making for ETF on the major European exchanges, we would have a bank account and we would be trading through a prime broker that would allow that access to all these different platforms.

So not only are we then exposed to just one PB that is regulated, they also allow us to use our capital on the multiple platforms.

On top of that, we are market maker trading from a delta neutral position.

Given our risk profile, the prime broker also allows us to leverage our capital.

Now when you go to the crypto exchanges, for us and for you, it’s like opening a separate bank account for each of them.

So we need to fund them individually and we are exposed to these risks given the states that those exchanges were in back then, you could argue that there was a larger risk in terms of defaulting than the exchanges that we were used to.

We had a few mitigating strategies there.

First of all, around the onboarding process, we were very diligent, and we did even more due diligence than we would do on a normal exchange – sometimes a bit to the frustration of the exchanges because they were not used to getting so many questions.

But it allowed us to select and filter out the bad and the good ones. That helped a lot in the beginning.

Second, we leveraged the blockchain technology because what the blockchain technology allows is it allows you to monitor the in and out flows of exchanges – through monitoring these type of activities, understand the flows of the retail coming in and out of the exchange.

And also you could see if there were maybe strange moves happening or there was a type of bank run taking place.

This also allowed us to spot some of the risks and events that happened bit earlier than the rest of the market.

Going forward, we are looking to see how we can work together with other partners to mitigate this type of counterparty risk.

For instance, we work with Copper. They provide an off-chain custody solution. This allows us to trade on the exchange, but keep the assets off exchange.

Potentially that moves into a phase where we can also use it for multiple exchanges. So we are actively looking at new solutions and working together with these partners to make changes in the market such that to an extent it looks a bit similar to what we are used to and we can reduce the counterparty risks.

 

Ian:

Okay, interesting.

So, and just to double click on one detail there, when you talk about opening a quote unquote “bank account” at each of those exchanges, that means you’re, basically having to fund in the funds on each of those venues, and have them available?

Because as we know, there’s no post -trade settlement set up like there would be in quite a few other traditional asset classes, right?

 

Michael:

Yeah, that’s correct.

 

Ian:

Like almost crypto exchanges, you would almost have instant settlements. So the moment you trade Bitcoin versus dollar, you immediately get the dollars into your account where – looking at, for instance, the ETF space, you have moved to T+1, but settlement cycles are either one or two days typically.

Maybe we’ll come back to that T+1 topic a little bit later, but one other aspect of your evaluation, you mentioned technology, and I can imagine Flow Traders  is set pretty well on the tech side, also for fast, low latency trading.

How much of that was a consideration for you when you were thinking about using some of the same strategies that you do in TradFi in this crypto space with, as you said, cloud -based infrastructure.

That’s not exactly what you were used to before, right?

 

Michael:

Yeah, I would say it was quite a different environment, something we need to adapt to, but also we saw as a challenge.

So I think a big difference there is latencies and also the indeterministic nature of the latencies that we have on crypto exchanges.

Comparing again to our traditional exchanges, they are built for low latency and we know exactly where they are located. We know how fast they process our orders.

We know how many meters we are away from that machine actually when we co -locate in the same data center.

So we can predict quite well what our latency will be when we’re trading on that exchange. And now when you look at the crypto exchange, when crypto exchanges started off, it was a retail market. It was dominated by retail basically.

For them, it was important to be able to service millions of users. And for that, the cloud technology was perfect because they could easily scale up or scale down the amount of resources they needed to be able to handle such loads.

But what they didn’t focus on, of course, was latency.

So when we entered this space, this was something we needed to understand. And we needed to deal with the unpredictability of the latencies.

Throughout the years, we’ve been talking constantly with exchanges on their technology. And on one end, we’ve learned a lot about the tips and tricks on how this cloud technology works and how we can improve our latencies there, how we can maybe integrate our cloud network within the more traditional network.

So getting the best of both worlds.

Also, we’ve been speaking to them about, okay, how do we set it up actually at the traditional side?

Because a good thing is now with also institutional liquidity coming in, latency becomes more and more important.

So they’re willing to listen to us and we also help them out in getting to a setup that is high performance and the metrics, for instance, are more predictable.

 

Ian:

So as kind of the F16 kind of machine that’s been used to operating at super high speeds, was a little bit of a slow down, at least at the beginning, getting into crypto, a little bit of a puzzle or a maze to figure some of those things out.

Do you think you’ve been successful in pulling things forward faster, kind of moving the cart faster along?

 

Michael:

Yeah, I would say so. If you look also at how we operated, crypto with the Flow Traders, and we’ve always been steadily growing our team. And we have now a team of over 70 people working on digital assets.

And even though the technology is different, I think to be competitive in the initial years, it was also more important that you are efficient with our capital usage.

 

And I would say then it was less important how fast you were, but just being in and being able to understand the products that are being listed, whether it’s futures or the perpetuals, which were quite new in that space, that was at that point more important.

But now you see more and more competition joining and then therefore it’s more of a requirement to be on top of your game on the technology part.

 

Ian:

Of course, small disclaimer here, Flow Traders is one of the designated mark makers on RULEMATCH. I think we speak the same language when it comes to ultra-low latency and how things will develop going forward.

But just scanning the market, do you see more HFT companies coming into the space? Do you think there’s going to more of an opportunity for that style of trading, not just from big players like Flow Traders, but from other smaller companies?

 

Michael:

Well, yeah, I would say that most large training companies have joined this space already because volumes have been very large.

Actually, think in the beginning there were a lot of small players that were entering this space because it was maybe more open, it was less regulated, so it was more easy to enter.

But now, for instance, you see the low latency exchanges, like also RULEMATCH has a very high -performance technology stack, of course.

This becomes more important that people have not just the noise, but also the network behind it to be able to compete at that level.

Actually this may be the other way around. And while smaller players have joined, you see this is getting more competitive and the larger players remain in markets.

 

Ian:

I think we also see the same thing.

Let’s shift gears just a little bit and talk market structure because I can imagine at the beginning, as you alluded to, that was a little bit of a challenge, kind of working through the maze of different venues and so on, but then also the different models of the market, you know.

On retail, so-called retail exchanges, you’ve generally had a central limit order book, but of course spread out all over the world across these different cloud servers.

Then there are other players who prefer to operate more on an RFQ model.

How do you as a market maker, you know, working across the globe in crypto markets, how do you deal with these different market models?

 

Michael:

Yeah. So, so if you talk about the most common market models, it is the central limit order book as you said.

And then you have the RFQ model, making also a slight comparison to for instance the FX market. They are quite a few similarities to the ECN model is very common, and they all serve a different purpose.

And if you look at the central limit order books, this is probably the most well-known model that that people know and exchange by.

So there’s an order book.

People can enter orders in the book and trades are matched if the prices are crossing.

I think the main advantage of this model is that it’s transparent and you have certainty around execution in such model.

Then if you look at for instance, the RFQ model, which is request for quote, this is typically used on a bilateral basis and it’s used when you want to execute a large order.

So if for instance you want to buy 100 million of Bitcoin, when you would go to your exchange, then you may not see that much of liquidity in the book.

The moment that you would try to execute it, either you would pay a lot of slippage, but more likely you would not get filled for the full quote, and you would also show the world basically that you are wanting to buy so many Bitcoins – which may move also the market in the direction you don’t want.

So in a model of RFQ, you would then go to, for instance, a market maker who’s connected to all the major exchanges and can typically hedge also these kinds of sizes in a more efficient way.

And in this way, it would also allow the information to be not exposed to the rest of the world.

Therefore, the RFQ model often works in cases where you want to execute a large size compared to the liquidity in the book on central limit oil books.

Then talking about ECNs, electronic communication networks, that is an execution model that’s often used in FX where makers and takers are split – separated from each other.

Makers are pricing to the takers.

And they don’t have to worry about maybe the very competitive market makers to trade against their quotes.

And this allows market makers also to be quoting tiny, quoting for more size.

So this has allowed the market, in effect, to become more liquid and basically trade at very tight spreads.

Yeah, when do you want to use such model? A nice example around the fit of a model is when the Swiss National Bank had sort of a surprise depeg of the Euro/Swiss franc.

And yeah, we were also trading it by then and we could see the prices, the prices up maybe more than 10%, but we could see the difference in prices on central limit order books and the RFQ and ECN models.

So you could see that firms were shifting to central limit order books because it gives the transparency of where the price should be trading.

And you also were sure that you would be able to execute.

Also the day after it remained a little bit like that. And I think now it has sort of returned in the old proportions again, but you can see how market conditions can change what kind of model is best fit for your purpose.

As a market maker, we are kind of agnostic to the market model and we will basically optimize our model apprising to what we see is basically allowing us to quote tightest.

 

Ian:

So different models for different situations for Flow Traders – it doesn’t necessarily matter. You did mention the word “transparency” in there and I’ll just throw this question in because when you think about funds or some large institutions, institutional money, those funds have a fiduciary duty to trade on best price.

And I’m wondering whether transparency or lack of transparency makes a difference where they are going to go to the market for what they do.

What do you think about that?  Also from a regulatory, fiduciary, legal point of view.

 

Michael:

Yeah, so I guess there are two angles to the transparency in the market.

So one is basically you want to execute a large book. As a market participant, as a fund, you don’t want that information to be published until maybe you’re fully executed.

So that should also determine somewhat which market model is the best fit.

Then on the regulatory side and on the crypto side, this is not that much developed yet.

But typically for other asset classes, there is a sort of time range in which you need to be reporting these kind of outside rates.

So I expect that will come also at some point for general transparency in the market and also being able see if you are able to guarantee the best price execution.

But that will have to wait until regulation is there that sort of forces things.

 

Ian:

Right. And regulation, as we know, is kind of a moving target, but some things happen in there.

And we might come back to that also in just a second.

We touched earlier on the settlement thing, and you mentioned kind of this instantaneous settlement, or some people like to talk about atomic swaps.

It seems like with the move to T+1 in the States for traditional assets, settlement is going faster. I mean, apparently to reduce risk.

But is that really the way to go?

Or do you think there should still be a post-trade settlement?

So maybe not leveraging the full capabilities of blockchain for instantaneous transactions.

 

Michael:

So, instant settlement has its ups and downs, of course.

I would say, if you talk about the counterparty risk, I think you’d almost want to move towards the shortest settlement cycle as possible.

And I think that’s also one of the reasons why you saw the move from T+2 to T+1.

But then if you look at it from a market maker’s perspective, who typically starts the day with the delta neutral position, ends the day with the delta neutral position.

If then throughout the day, the market maker is constantly buying and selling, and the market maker only needs to settle one time per day, then a post-trade settlement window of one day later is actually quite efficient for the market maker, because then almost no settlement needs to happen.

And if you were to have atomic settlement, it does mean that the capital constantly needs to be available for it to settle.

So there are definitely advantages to it and perhaps as liquidity would be more combined into a large pool like the benefits of netting may remain as you shorten the cycle. But yeah, basically in the short term, it will impact the capital efficiency of market participants like market makers quite a lot as you reduce the settlement cycle.

 

Ian:

I can imagine that Flow Traders is staying quite a bit on top of those developments and will be ready technically one way or the other, however it goes.

Let’s dive even deeper a little bit to something that I’m sure matters to market makers, but also the really big professional large trading firms that you mentioned.

One thing is price discovery and the other thing is spread. Just starting with price discovery: people looking on from the outside, from the TradFi background don’t get how price discovery happens. How do you see that process working in crypto markets, global crypto markets all over the world?

 

Michael:

Yeah, so price discovery for me happens mostly based upon where liquidity is and trades happen. So two important factors here. One is where are exchanges located and second, where are the people trading?

In crypto, currently the largest exchanges are located in Asia.

Naturally, this is definitely a big hub in terms of where price discovery happens.

But then to the second point, it does change throughout the day where people are trading.

So you do see shifts in liquidity from APAC to Europe to US. for instance, also when you look at the US ETF lines and the forms that are trading there, you do see shifts in where price discovery happens on a global level.

 

Ian:

And talking about spreads, there’s a little bit of a debate and we talked about this internally.

People say that as institutional money, big money comes into crypto, then spreads should tighten and order depth, order book depth will grow.

At the same time with more regulation and that regulation probably hitting hardest on institutions, costs may go up and there may be other factors that make it more difficult to be really active. How do you see spreads developing in crypto or at least in the major crypto assets, Bitcoin, Ether and so on over the next couple of years?

 

Michael:

Yeah, so I would expect spreads to continue to tighten in the next three to five years. like you said, institutional liquidity is an important factor and also regulation.

Naturally, when there’s more liquidity in the book, when there’s more volume that allows market makes to tighten bidder pricing also likely increases the profit pull.

It allows additional competition to enter.

So this generally will have a trend to tighter spreads and to deep end liquidity in the book. Now, when you look at regulation, it can be a little bit twofold. Definitely it will increase the costs for people to comply to regulation.

So that may impact the spreads in a negative way.

On the other hand, I do think it’s actually in the current state of crypto, it’s enabling institutions to enter the market.

So if done well, regulation can have a net positive impact on the spreads. And I say for regulations, it’s very important to consider these kinds of balancing acts – on how that impacts the market, how it impacts the accessibility.

Because the last thing you would want to see is that liquidity is moving away from a jurisdiction as a result of too stringent regulation.

We are both active on the more regulated part and the regulated part and we’ll always try to maintain the tight spreads and deep liquidity in the books as a market maker.

Of course. yeah, we see it as also as a role to tighten these spreads over the next two, three, five years, perhaps a little bit more similar to what you see currently in FX.

 

Ian:

And let’s move then to the regulatory topic, since you said you’re quite on top of that.

And we mentioned to MiCA before this is a really big thing for the European Union, which includes the Netherlands where you’re based, but is also putting it a little bit differently positioned to other locations around the world.

How much are you really focused on figuring out the rules and getting ready for MiCA at this point? Or is it more of a wait and see kind of approach?

 

Michael:

Yeah, MiCA is there to provide regulatory clarity within Europe around trading crypto assets, mostly to protect retail investors, but also to regulate the virtual asset providers where we’re trading.

Also for us, it has quite a big impact and it’s going live, the stablecoin regulation is going live end of June and for the future asset profile is going live end of the year.

Perhaps we like that there’s still some activities within MiCA whether market makers are in scope or not.

But we do need to be preparing for when these regulations kick in because it’s only six months away.

And also it will have impact on our trading activities if stablecoins are going to be delisted or not based upon whether they are authorized by MiCA.

 

Ian:

Right. And you mentioned stablecoins.

You at Flow Traders  have a stablecoin, a Euro stable coin project together with Galaxy and DWS. Can you give us a high level overview of what that is, where the idea for that came from and what Flow Traders  is doing in that construction?

 

Michael:

Yeah, so I believe stablecoins and Euro stablecoins will be very important for the market.

And especially for Europe, if you look at, for instance, trading volumes in the cryptocurrency market, over 90% of the fiat to crypto trades are done in dollars.

Well, on other things like where the developers are located or how much volume is during the European trading hours – it’s much more balanced compared to US and Europe.

So there is a big opportunity for Europe to have its own stablecoin in euros and also for it to grow its role in the market.

As a market maker, stablecoins are super important for us. It’s simply a better product almost compared to fiat if you look at the use cases where we need it.

So for instance, on our OTC trading, it allows us to instantly settle with our counterparties.

When you look at our own exchange trading, if we need to move funds from one or other exchange, if you need to do it through the fiat rails, it can take a couple of days over the weekend for it to arrive and stablecoins allow you to do it 24 -7.

And even it supports us in our ETF trading business, on the, for instance, the creation or redemption side.

So I believe that the importance of stablecoins is clear and the Euro stablecoin is a good opportunity for Europe to grow its presence in the market.

And as for the AllUnity stable coin that we are launching with Galaxy and DWS, obviously we’ll be providing liquidity for the stablecoin.

DWS will be responsible for the asset management and GALAXY will be leveraging its technology experience for the technology for the stablecoin.

 

Ian:

Do you have hopes or ambitions that this would be a stablecoin adopted by quite a few other market participants, or is this more something that’s just for you guys to do your business in the areas where you cooperate and work together?

 

Michael:

No, it will be a perfect stablecoin. So the goal is really for it to be adopted by all players. And also to see Euro stablecoins present on the DeFi side where we also active.

 

Ian:

So it has a DeFi focus or potential. That’s also something that you’re keeping in mind.

 

Michael:

Yeah, definitely. Also for DeFi, when you want to use stablecoins there, it’s either UST or USC. But for Europeans, there’s not really an alternative to that. So they always need to exchange first to dollars, to be able to experience all what’s currently happening on DeFi.

So definitely this is an important angle as well to increase the pressures there of Euro and Euro stablecoins.

 

Ian:

I’ll just throw in this small comment or also question. There was recently an article in the Wall Street Journal from a US congressman who was very much promoting adoption and, shall we say, legalization of stablecoins in the US.

And his point was that they would be a great buyer of US debt.

That’s a little bit of a different way to look at it as a way to prop up the US government. I suppose that’s not a motivation for this stablecoin from you.

 

Michael:

No, I must say I haven’t really thought about it, but that was not the consideration.

But I do think that also from a US perspective, despite maybe even the resistance they have on the regulatory side, they have  sort of a dominance in the crypto market in terms of dollars.

So I also believe that they will want to protect their share.

Yes, stablecoins are also, think, one of the first things they will be regulating given also the size of the market, but also the importance for the US to have a large share in the dollar versus crypto trading.

 

Ian:

Okay. Yeah, we’ll see how MiCA affects things and how MiCA, I mean, some people have said that it’s kind of like an “iron curtain” coming down over Europe where everything in Europe is going to have to be under “strict lock and key.”

On the other hand, some people think of regulation and I think we share that view that it’s an enabler as well. Do you see it more positively or a bit negatively?

 

Michael:

No, we definitely see it positive and definitely as an enabler for market participants and large institutions specifically to enter this market.

Also, if you look at our ETF business globally, where we are covering all the major global crypto ETF initiatives, there’s often a doubt whether the banks that we work with can support crypto.

And I believe that one of the reasons is that there’s no clarity from regulation around what and what they cannot do.

So the answers of such big framework, it should be positive that there are still bits and pieces that need to be figured out. So it’s important that clarity is given there in the short term, but I hope and I believe that this will positive for the European role in the crypto markets.

 

Ian:

Obviously we can’t conclude the conversation without going back to the subject of our last conversation in Davos during WEF just after the spot Bitcoin ETFs launched in the US.

Flow Traders  was very much and is very much involved there.

Can you just kind of give us a summary how things have gone over these six months or so? What is your feeling about where it has been and where it’s going?

 

Michael:

So the approval and the launch of the US Bitcoin ETF has been very positive for the market, of course.

Having names like BlackRock and also the large banks in the US support this product really “credentializes” this asset class.

I think from that perspective, that’s already added a lot of value. Then if you look at the volumes, the inflows, they have exceeded expectations.

So that has been a big success for the market and it is reflected in the price of Bitcoin currently.

So we’ve been welcoming this product for a long time and we think it’s a very good way to make Bitcoin or other asset classes even accessible in efficient and also cost effective way.

And yeah, we’ll continue to support this and we hope that the ETH ETF will soon be listed in the US.

 

Ian:

Yeah, I think we’re looking forward to that. And our friends at 21Shares were talking about that also recently there very much in that race as well.

You mentioned BlackRock and it was kind of funny to see BlackRock really take a pretty quick jump first into the ETF and now also going forward to a tokenized fund.

Seems like Larry Fink is really jumping into things pretty, pretty fast.

Just quickly from, from Flow Traders perspective, are you also thinking about the potential of market making on tokenized funds, tokenized assets in the future?

 

Michael:

Yeah, like I believe that tokenization is one of the major trends and most talked about topics currently in the market.

And I’d say the most successful example is actually the stablecoins – tokenized fiat. But now you see is also what’s been coming up the last year, our tokenized real world assets and in particular the US strategies. So similar to what BlackRock is offering right now

And it’s almost like a stablecoin, but it offers also the yield attached to it.

In a way it’s a superior product, there are also more regulatory constraints around it. It’s definitely on our mind and also on this end, we will want to support new initiatives coming through. I can imagine.

 

Ian:

Again, Flow Traders  right at the forefront of everything that’s coming along.

Before we finish, I’d like to ask you the question which I asked to all of the guests on RULEMATCH Spot On.

And that is if there is something either at Flow Traders  or somewhere else in the crypto market among institutions in this space that is happening and which we should keep an eye out for something that maybe not many people are talking about yet, but that will become more important in the near or midterm.

If not, that’s okay. Just give you the opportunity.

 

Micheal:

Well, I think it’s talked about a lot and it’s probably well known, the ETH ETF in the US.

It’s really something we are looking forward to and preparing for.

We see it as a big step also in shifting, in little bit the stance of US regulations towards cryptocurrencies.

So it’s not just another product that is listed, it’s a shift we see in the stance of the US politics.

 

Ian:

Okay. Yeah, that is quite a significant step. And I think many people in the space have been waiting for it for a long time and wholeheartedly applaud this small step and also giant leap forward. With that, I think we’ll wrap things up.

Michael Lie, thank you very much for being on RULEMATCH spot

Thank you to Flow Traders for being involved and we look forward to more good things to come. Maybe we’ll come back and have another conversation very soon.

 

Michael:

Thank you, it was a pleasure to be here and looking forward also for future discussions.

Thanks.

 

 

Welcome to RULEMATCH Spot On – a podcast by RULEMATCH, the interbank trading and settlement venue for cryptocurrencies and digital assets.

Hosted by Ian Simpson, RULEMATCH Spot On is the only podcast focused exclusively on the institutional crypto and digital asset industry.

Podcast episodes offer wide-ranging, global perspectives and in-depth insights on what banks, hedge funds, asset managers and other financial institutions are doing with crypto and digital assets – and how they are doing it.

With in-depth conversations with people “in the know” on topics ranging from exchange-traded products to banking capital requirements to counterparty risk, prime brokerage and crypto lending, RULEMATCH Spot On is tailored to help subscribers stay on top of the latest developments in the institutional crypto space – and take advantage.

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