Are Digital Assets Up to Speed for Institutional Trading?

In the mid-2010s, before founding the FTX cryptocurrency exchange, Sam Bankman-Fried and some of his associates worked at Jane Street Capital. The highly quantitative firm’s algorithmic trading and risk management systems presumably informed their vision for FTX.

Bankman-Fried concluded that existing crypto exchanges “were not terrifically resilient, not great at risk reduction,” Mark Wetjen, formerly of the Commodity Futures Trading Commission, who had joined FTX US as head of policy and regulatory strategy, recounted during a panel discussion at Washington’s American Enterprise Institute on October 4, 2022. FTX engineers set out to build from scratch an exchange that could “bridge traditional finance with digital-asset finance, bring the best of each together.”

That work was apparently still in progress a week later when Bankman-Fried tweeted about an upgrade planned for November 21, 2022: “a whole new order matcher, lower latency API pathways, a whole slew of other features.” It was an answer to “complaints from users [about] the high latency and low throughput of the platform’s matching engine,” as The Block noted in its report.

Max Boonen: Harsh verdict on FTX.

Max Boonen, co-founder of the institutional liquidity network B2C2, told CoinDesk in 2023 that FTX was  “slow, incomplete, buggy and coded by people who had never done it before.”

FTX went out of business on November 11, 2022, and “version 2” was never rolled out. But despite the good intentions, and for all the efforts then and since to bring the crypto market structure up to what might be termed institutional grade, parity with the transaction speeds, costs, capacity, security, reliability and resiliency of traditional finance (TradFi) still requires some leaps of faith.

The Tokenization Movement

Two years since FTX’s collapse, a growing number of top banks and asset managers are exploring and seizing emerging opportunities to tokenize real-world assets using blockchain, or distributed ledger technology (DLT). Resources at their disposal include Depository Trust & Clearing Corp. and other financial market infrastructures crossing the "bridge” into digital; tokenization platforms such as Securitize, the one chosen for BlackRock’s BUIDL fund; and central bank initiatives such as those of the Monetary Authority of Singapore’s Project Guardian and the Bank for International Settlements Innovation Hub.

Securitize’s Carlos Domingo: “Sub-second, sub-penny.”

Blockchain offers a means for instantaneous transaction settlement, potentially disrupting that end of the TradFi chain. At the same time, there are indications that the trading front end, where transaction costs are closely watched and low, if not ultra-low, latency rules, is coming up to speed.

Announcing Securitize’s recent selection of Wormhole as “official blockchain interoperability provider” for tokenized assets, Securitize CEO Carlos Domingo said, “Tokenized securities need to thrive on public, permissionless blockchains to unlock the potential of blockchain technology.” The Wormhole partnership “will help enable sub-second, sub-penny transactions and move us into an increasingly cross-chain ecosystem, showcasing yet another example of how public blockchains enable new use cases that had previously been unavailable.”

Greater Speed, Less Friction

When investment manager abrdn in 2022 became the biggest outside investor in U.K.-regulated digital securities exchange, brokerage and custodian Archax, then-abrdn CEO Stephen Bird said, “Blockchain technologies are inevitably going to form a big part of the future of financial markets. There is the potential to offer greater transparency, greater speed and less trading friction by using these nascent digital technologies.”

In June this year, Archax issued on Algorand blockchain tokenized interests in abrdn’s €3.8 billion Euro Money Market fund. “The future of finance is truly instant – including the instant finality of transactions. This partnership between Archax and Quantoz [Payments] to bring both a digital euro and a tokenized fund to Algorand makes this a reality for registered investors across Europe,” said Eric Wragge, global head of business development and capital markets for the Algorand Foundation.

SDX’s David Newns: Separating trading and custody.

In October, Switzerland-based SIX Group’s SIX Digital Exchange (SDX) announced a partnership with RULEMATCH to offer an integrated solution to trade, settle and manage crypto assets. “Until now, the digital asset space has been held back by concerns around speed, compliance and fragmentation,” said SDX head David Newns.

The partnership “tackles these issues head-on by providing transparency, capital efficiency and, crucially, a clear separation of trading and custody roles,” Newns added. “This means institutional investors retain full control over their collateral via SDX’s custody and can segregate assets by crypto address, ensuring clarity on asset location at all times.”

Down to Microseconds

Crossover Markets comes at the institutional opportunity as an electronic communications network (ECN), an order matching model that became a disruptive force in equities trading more than 20 years ago. It brings speedy execution and frequent price updates into crypto, according to co-founder and CEO Brandon Mulvihill. He sees it as bringing best practices from equities and foreign exchange into digital assets.

On the company’s CROSSx platform, “we execute 99% of our trades in sub-10 microseconds,” Mulvihill said in terms familiar to high-frequency traders. Crossover stresses that its “purpose-built” and “execution-only” focus differentiates it from typical cryptocurrency exchanges.

Crossover Markets’ Brandon Mulvihill

“From the market maker’s perspective, it means they can see 200 to 300 price updates in the time that Binance [the current crypto exchange volume leader] moves once,” Mulvihill said. “You can change your mind 199 times versus what you could do technically on other platforms. That's why speed matters. It indirectly compresses spreads.”

CROSSx achieves low latency by using bare metal servers, the Equinix LD4 data center and, in a pilot, Amazon Web Services in Japan. “We try to always reduce latency,” the CEO continued. “We want the totality of execution speed to be as fast as humanly possible.”

Costs Down, Liquidity Up

Regarding costs and efficiency, a market maker would not be expected to do all its trading on one platform. But Mulvihill contends there are advantages to doing more on CROSSx. Trading on 50 crypto exchanges, and having to settle with all of them, “does not allow the efficiency to reduce cost of capital and reduce the cost of trading such that people can reasonably expect the monthly volumes of the market to grow,” he said.

“As costs drop,” he went on, “volumes increase. It allows for more institutional participation, because you're going to see more liquidity. So fees are compressed and volumes grow. You have more liquidity in the ecosystem. You get more participants joining the ecosystem.”

The BSV Association, which has an enterprise blockchain protocol, in a report in May estimated that 125 billion digital devices will be connected globally by 2030, compounding financial transaction data volumes already at an all-time high. Since 2008, according to the report, more than 500 blockchains have tried to establish digital trust, which shows how challenging it is for a venue to handle high volumes at lower cost.

BSV says its blockchain is designed for extraordinarily high volumes. The association’s outreach director, Shawn Ryan, says that while banks tend to focus on permissioned, private blockchain networks, these can limit participation. BSV provides transparency and auditability along with global access to encourage broader ecosystem collaboration.

Transactions and costs at scale

Source: BSV

Additional Applications

To address banks’ blockchain cost and scalability challenges, BSV touts low transaction fees, especially for high-volume, low-value transactions. With a broader range of participants, BSV is said to be more resilient against single points of failure. And it looks beyond specific applications such as clearing and settlement, cross-border payments or central bank digital currencies to include internet of things (IoT) and supply chains, legal verifications and enterprise resource management.

Partior, promoting a “unified ledger” for real-time processing and settlement, announced a first close in July of a $60 million-plus Series B funding round led by Peak XV Partners and supported by Valor Capital Group and Jump Trading Group as new investors, and by JPMorgan, Standard Chartered and Temasek as existing shareholders.

Singapore’s DBS Bank, JPMorgan and Standard Chartered (founding shareholders along with Singapore fund Temasek) are using Partior to facilitate payments; Siemens and iFAST Financial have used the platform through Standard Chartered for access and control of working capital, 24/7 availability and faster, more seamless payment flows.

More Open Networks

“Big banks are building their own single-bank token networks, but that can only serve their corporates or their financial firm clients,” said Partior product director Abhinav Goel. “We have first-mover advantage by having the interbank network. Banks like JPMorgan or UBS are more than happy to come, and we are able to exchange money across them, which is typically not possible in their own single-bank ecosystem.”

In the cross-border, multi-currency context, in Goel’s view, settlement is a bigger hurdle to speed than is messaging. Partior is building new applications, such as a cross-border payment application that includes foreign exchange payment versus payment (PvP) capability.

The value of PvP for financial institutions and their treasury teams is that “otherwise they must keep an immense amount of collateral with their custodian in order to do FX,” Goel said. “They can release that collateral and use it for a better yield gain.”

Partior works with real-time gross settlement (RTGS); fund transfers can be done 24/7, regardless of when markets are open. There is another example of this kind of service in Citi’s digital assets platform.

Partior is looking to increase liquidity by bringing commercial banks onto its network to collaborate with central banks for interbank settlements.

Jeffrey Kutler of GARP contributed reporting for this article.