Travis Schwab, CEO of Eventus Systems, and David Olsson, global head of institutional distribution at BlockFi, joined host Paul Gordon to discuss their experience between the worlds of traditional finance and crypto. They also discussed the balance between the institutional and retail needs of the crypto sector.
Travis has been involved in the capital markets for 25 years in various capacities. For the past six years, he has headed Eventus, a reg-tech company providing trade surveillance, market risk and transaction monitoring solutions with a strong presence in the digital asset space.
David has a background in traditional finance from Merrill Lynch and Credit Suisse across structured financing, structured products and equity derivatives. He moved to BlockFi in May 2020 to head their distribution effort. BlockFi is a fintech platform and financial services company aimed at the crypto ecosystem for retail and institutional investors.
Making the Switch From Traditional Finance to Crypto
(4:08) Coming from a traditional financing background, market fragmentation was a surprise with bitcoin split between many different exchanges, said David. Crypto funds whose market caps have quintupled since starting at BlockFi and smaller funds gaining traction with larger investors and blue chip names have also been significant.
When asked if it’s too late to get into crypto, Christine Sandler, Fidelity’s head of sales and marketing said that crypto is not even in the first inning and that “we’ve just pulled into the parking lot,” David recalled.
(6:48) BlockFi is regulated in the US and they perform chain analysis on the coin. The whole architecture around how BlockFi deals with clients is very similar to traditional models, said David.
Security considerations are high on the agenda.
(8:11) “The fixation on security is pretty overwhelming from an implementation standpoint…Bitcoin is pretty unique. If you don’t have that hash, it’s a problem. That security focus really drives a lot of decision-making: how you implement software, how you engage with them from a client servicing standpoint. And so that really was probably the biggest unique aspect of moving into this space compared to some of the other traditional asset classes,” said Travis.
The constant flux in volume and the rapid evolution of digital assets creates a challenge to keep pace with innovation, Travis added.
Security and Settlement
(10:20) Eventus has developed a software platform called Validus to monitor the crypto markets. It amalgamates market and life cycle data, with the focus of the system providing alert generation. Firms use the Validus platform to analyze data relating to their regulatory status: if orders are marked correctly, if they are monitoring for wash trades, and if orders are formed correctly. There’s lots of coverage across different asset classes and geographies.
(11:24) “Where it gets interesting in the digital asset space is the sheer number of alerts that we’re dealing with at some of these venues. A lot of that is because our approach is…different in the fact that there’s a fixation in the surveillance industry to reduce false positives. We take a different approach…We cast a wide net and we think there’s data intelligence in those alerts…We provide automation and machine learning technologies to really boil that group of alerts and bubble up the most actionable…You might have 30,000 alerts a day but really looking at 30 that are the most relevant to what is the most concerning to you as a business,” said Travis.
The AML/KYC marries the trade surveillance side with more of the AML transaction side of things. That’s also being driven in a really positive way by the digital asset exchanges. In traditional exchanges, those worlds are bifurcated, and in crypto they’re not, noted Travis.
(14:03) Settlement is a particularly scary place for traditional markets coming into crypto. Sending coins out not knowing where they’ll end up where they’re supposed to, and making sure exchanges are connected is very important.
(14:38) “It’s basically connecting all the different liquidity pools and making sure everybody’s speaking a common language,” said David.
BlockFi can execute trades for clients on different exchanges to give the client a more seamless experience.
(15:56) Some clients have gone from 15 million messages a day to 1.5 billion, so to deal with that change in volume is very challenging, said Travis. In the traditional asset space, there’s a levelling out of volume, which is not the case in digital, where volumes grow in an almost exponential fashion.
(17:01) “In the digital asset space, the exchanges now are hyper-vertically integrated. They’re doing everything for clients from opening the account…through custody, prime brokerage; then what’s happening in the marketplace is you have firms like BlockFi [that are] taking pieces of that ecosystem and making it a more resilient ecosystem, which will attract institutional investors because you need those levels of safety and transparency,” said Travis.
The intermediation that’s happening in the traditional asset classes is happening in reverse in the digital asset space, says Travis. Whether it’s settlement, clearing, consolidated tape, regulation, SROs — all those pieces are in the process and that opens up opportunities for firms like Eventus Systems and BlockFi.
(19:04) Crypto exchanges’ approach to regulations are as they consolidate, the ecosystem will be bifurcated into two parts: one focused on attracting institutional participation, and one more focused on retail and less upon institutional investment and the structures that encourage that investment. The digital asset space is going through a cost-benefit review focusing on value adds and whether it’s necessary to be part of an internal structure.
(20:30) “How can you lever a ton of this innovation happening within the vendor or participant space to help your business grow faster? In a lot of ways, that’s partnering up with firms like BlockFi or Eventus so that they can move faster and benefit from the community. If you do it internally, you’re only eating your own dog food, as the saying goes, in the software development space. We have the benefit now of many exchanges that are feeding us ideas and ways to do things better, so that gets compounded within the product and redistributed to everyone else. So there’s obviously a really good network effect there that’s taking place,” said Travis.
Accountability and Regulation
(22:06) The irony is you have way more transparency in crypto than any other asset class. The intention of the creation of crypto as an asset class was initially driven by anonymity, yet the reality has been the opposite effect: You have greater transparency all the way into the chain that you don’t have in traditional asset classes, said Travis.
(24:43) One of the things that attracts institutional investors over time is you really do have better transparency than almost any other asset class, says Travis.
(26:27) To address solving issues in the industry, the New York State Department of Financial Services laid out four problem statements, which all focus on transparency and surveillance within the digital asset space, assembling a really strong group of industry participants to pitch solutions for these issues, with Eventus being part of these talks, said Travis.
(27:50) As far as EMEA engagement, regulation has been sluggish, slowed even further by the pandemic, David said. MICA in Europe is a few years away, but on the whole regulation occurs on a country by country basis. There has been negative press about bitcoin from the head of the ECB but also talks of launching a central digital bank currency, which has the same properties as bitcoin of easier surveillance, said David.
(29:05) “Hopefully in the next year or two we’ll see regulation pick up and I think particularly for institutional investors we talk to, there needs to be clarity on if a wealth manager or a fund wants to allocate to crypto, how can they do that and still maintain a regulatory status [and] whether they can distribute their fund …or their services easily. I think that’s something that needs to be tackled.” said David.
(30:10) From the DeFi perspective, Eventus hasn’t looked at it too closely from their client base yet, says Travis. It’s probably not going to get adopted as heavily on the institutional side as the retail side, but that could change. That’s not the focus of their existing client base but they’ll see where it goes. Travis’ assumption would be that’s further afield than the traditional trading on exchanges for institutions.
(31:04) BlockFi saw a surge in the DeFi summer, said David. BlockFi’s core business started with borrowing and lending and there was a lot of demand to lend ether in particular to put onto DeFi. Since then there’s still real interest and clients would love for us to be a portal, but the reality is it’s again more regulated in the US. The technology and the idea have legs. It’s just the implementation is a way off, David said.