Improved market infrastructure that can support growing institutional interest in crypto assets has been a hot topic, with significant investment flowing into companies building solutions. Until recently, much of it was focused on the United States, especially when it comes to custody and prime brokerage. But recent surveys from Fidelity and Cointelegraph reveal there is a significant interest to build among asset managers in Europe coupled with the European authorities poised to push through their MiCA regulation at the end of 2021.
Teana Baker-Taylor spoke with Ilia Drozdov, co-founder of Finery Tech, and Oliver Yates, CEO of Sheeld Market — both EU-based startups — about their prime brokerage and liquidity aggregation solutions and what the regulations will mean for them.
Finery Tech’s Drozdov explained how he and his co-founder have worked for an algorithmic hedge fund, so they know about toxic flow and how the industry works. He said they wanted to design their platform network to exclude certain traffic, pointing to wash trading in inflated volumes by exchanges in the crypto industry, adding that it can be a real headache for a buy-side firm to find real liquidity in the crypto market.
(14:45) “Given these two inputs, we’ve designed a platform that allows peer-to-peer trading between the participants and we have two types of players: market makers/liquidity providers on one hand, and on the other hand buy-side firms — hedge funds, corporations, even banks. And P2P means that the trading is closed so you know with whom you trade and you can customize the spread, you can customize liquidity. And this is also compliant. So this is our flagship product that we are currently developing,” said Drozdov.
Sheeld Market’s Yates explained how the company is an EU-regulated prime broker for cryptocurrencies. They provide the core services for buy-side firms. It is more custody on one side and everything around execution data reporting on the other side. Sheeld has accounts on dozens of exchanges with several liquidity providers and their customers can access that liquidity through one interface, or API, via the company. He explained that they are similar to a traditional equities prime broker in that they provide low-touch access like direct market access and smarter routing across venues as well as high-touch services like price treatment requests for quotes for large block orders.
(16:08) “The goal here is we really want to handle the plumbing so that our customers can focus on their strategies and their business,” said Yates.
Finery Tech, meanwhile, is a non-regulated entity. Their final aim is to remain the technology vendor. They created technology that connects to different types of users, 90% of whom are regulated companies in the UK, Netherlands, Switzerland and Estonia. Finery Tech is not custodial and doesn’t touch clients’ funds. They facilitate trading, or communication.
As of now, they have a legal opinion from the local legal team, but the upcoming regulation for crypto assets may change that. They might be recognized as a multi-ledger trading facility in crypto assets, so they are currently preparing for this aim. But they want to keep the essence of crypto intact without any middleman and instead just provide the tools for their clients to reach their aims directly.
Sheeld Market is regulated by France’s AMF, a process that Yates explained took six months. The first month was dedicated to completing the application, for which they received help from outside counsel. Most of this part of the process involved AML, as well as operational processes on background checks on company executives, internal controls and compliance controls. The rest of the time was filled with back and forth between the company and the AMF that was similar to what you could expect for any brokerage or bank.
(19:56) “The AMF was very supportive. The French government is bullish, generally speaking, around not just tokens or blockchain but crypto, which is good for us. They’re also quite educated on the topic, the terms and the market structure. Now they were quite tough and also their questions generally went much further than what was legally required, according to the law. So that was I’d say the most difficult part…I’d say it’s a quite tough license to get,” said Yates.
As for whether the license ticks all the boxes for institutions, he doesn’t think it’s that simple in France or in Europe more broadly. Many of these institutions rely on banks as well for a lot of their operations, whether brokerage or custody. And at some point a bank will be involved, and they’re not currently comfortable with the layer of AML that is required by the AMF, Yates explained.
Finery Tech’s Drozdov said that the guidelines published by the European Commission about MiCA sound promising unlike the strict regulation from BaFin in Germany, which considers all cryptocurrencies a financial instrument. He hopes that Europe will end up with some light version of regulation that will foster innovation rather than having a burden on startups.
Sheeld Market’s Yates said there are four main points in the MiCA consultation that could be problematic for decentralized finance (DeFi): 1.) the implementation of the travel rule; 2.) stablecoin issuance; 3.) KYC on occasional customers will send them to other exchanges; 4.) barriers to entry to get licensed the way that Sheeld Markets did will be too difficult for incumbents if France’s agreement is adopted EU-wide.