Financial institutions such as banks and broker-dealers are pushing crypto businesses such as exchanges to communicate using the same protocols as traditional finance.
And crypto firms in markets such as Hong Kong are beginning to listen, in anticipation of winning institutional flows.
“Five years ago, there was no institutional infrastructure in crypto,” said Pamela Lee, head of sales for Asia Pacific at Talos, a provider of trading systems to crypto firms. “Now there are institutional toolkits for custody, trading, and risk management. We’re learning the best practices from TradFi and adapting them to digital assets.”
One of those best practices is the use of standards, but so far this has eluded the crypto industry.
One important standard in TradFi (traditional finance), evolved over nearly 30 years, is to use FIX, the Financial Information eXchange, to transact information about securities in real time. It is the securities world’s equivalent to SWIFT in payments and correspondent banking. FIX is used to communicate pre-trade and post-trade information, and to report to regulators.
The global investment banks, brokers and asset managers are among the 300-odd firms that comprise the FIX Trading Community, a non-profit entity that manages the protocol.
Born with APIs
Crypto exchanges have taken a different path. These are retail businesses that emerged in the absence of regulation. They connect to other market participants via REST APIs or WebSockets, says Matthew Lempriere, head of sales for the UK, Middle East and Asia at BSO, an IT services consultancy. “Financial institutions aren’t able to use these formats to communicate,” he said.
REST APIs are application programming interfaces that set rules between two parties to create web services. They are easily customizable and scalable. The rules ensure a degree of data security, because they require a party to request specific data. But they can’t handle complexity very well, and they aren’t great for latency (that is, they can be slow).
WebSockets are similar but they don’t require one party to request data. This software just connects servers that push out information as soon as it appears. This makes it fast and convenient for services that require real-time information, like trading crypto. But it exposes entities to the internet, so it’s not very safe. No financial institution would dare expose itself to such a risk.
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The developers behind crypto businesses have relied on APIs to communicate trade orders and other information. They could throw these up quickly, and there wasn’t a need to bother with regulatory reporting. The retail culture of the industry wasn’t very focused on security, either.
Moreover, crypto venues are all different because they’ve all come up with their own API frameworks. There is no industry standard for how to package information. This has made it expensive and challenging to trade across different exchanges.
“There’s no standard definitions of behavior, self-regulation, or organization in crypto,” said Sean Lawrence, head of Asia Pacific at crypto data vendor Kaiko. “FIX is one vector along which standards for connectivity and trading might normalize the world.”
Pushing standards on crypto
During crypto’s boom times, this was just a cost of doing business. In today’s environment of scarce liquidity, those frictions now pose a big barrier.
Institutional investors are therefore viewed by some industry players as saviors. In Hong Kong, which is building out a regulatory regime to encourage licensed institutions in digital assets, TradFi and crypto interests are sitting down to hammer out ways to jumpstart institutional flows.
The FIX Trading Community has started by adding tags for tokenized assets. “That’s the start of this standardization,” said Vince Turcotte, director of digital assets for Asia Pacific at Eventus, a market surveillance and risk management firm.
The conversation about standards is now focused on getting crypto firms to adopt the FIX protocol.
A handful of digital-asset companies have already done so. When DBS Digital Exchange launched, it chose FIX standards, says Daniel Lee, its former executive director. “Institutions routing equity orders were already familiar with FIX, so it was easy for them to do integration,” he said. “They didn’t require a new tech team.” Lee is now Web3 head at Banking Circle, a Luxembourg-based payments player.
Another early adopter was Hong Kong-based OSL, a licensed virtual-asset exchange. Like DBS Digital Exchange (which used OSL tech for its own stack), it has had an institutional focus.
“When institutions enter this space, they go straight to FIX,” said Dave Chapman, OSL’s co-founder.
These are exceptions, however. The crypto industry is overwhelmingly retail: Binance, Coinbase, Crypto.com, OKX, and the failed FTX are all retail businesses. Some will want to stay that way, but others, such as OKX, are gunning for a Hong Kong license – which means they will be doing institutional business.
“A few crypto exchanges are using FIX to communicate with their clients, but not all, and having that level of standardization across the industry would really help,” Lempriere said.
It’s usually the case with innovation that the fintechs force the incumbents to change their mindset if they are to transform themselves and stay relevant. That’s only partly true with crypto, however. Now the tables are turned, and crypto firms are the ones that need to change their mindsets if they are to be able to accommodate institutional money.
“Some crypto firms that have built their own matching engines are now asking us how to format data for post-trade consumption,” Turcotte said. “We steer them right to FIX because using it will save them integration costs in the long run.”
Meeting in the middle
Embracing FIX protocols, however, doesn’t necessitate a massive change to a crypto exchange’s business. It does require awareness and the willingness to integrate the FIX package of onboarding software.
Because FIX has evolved to handle all kinds of securities, commodities and foreign exchange, it is in some ways more flexible than a suite of APIs.
But there’s also a time-to-market aspect. Banks do of course use APIs to send information to clients. But with all of their layers of approvals and compliance needs, they can’t handle APIs as their default for real-time trade data. Every new API or even upgrade requires weeks or months of internal testing before it gets approved. This makes it impossible for institutions to connect to digital-asset partners via APIs.
But if it’s via FIX, then the banks can act right away. It’s just part of their existing setup. They don’t need any special approval. And the FIX Trading Community is responsible for upgrades.
No quick FIX
This doesn’t mean a single protocol is a quick, um, fix for the industry.
For example, Daniel Lee, head of Web3 at payments provider Banking Circle, notes that crypto exchanges today use standards created by ISDA, the International Swaps and Derivatives Association, to trade derivatives.
Might ISDA be a better model for digital assets? Lee says ISDA’s framework might be better suited to tokenized securities borrowing and lending.
“But for order routing, FIX would have a role to play,” Lee said.
There are other barriers to cross-venue trading in crypto that FIX won’t help, such as gas fees and high capital costs for settling on multiple exchanges. Custody solutions are still nascent, as they were designed for retail investors rather than fastidious instituitons.
Nor does FIX or other TradFi protocols address how to operate in DeFi, or decentralized finance, in which trades – from price discovery to settlement – are guided by smart contracts. In the DeFi world, what matters is agreeing on a source of truth regarding asset prices and terms.
“In this space, FIX would have to evolve from being a protocol, to becoming an oracle,” Lawrence said.
Any attempt at standardization, and making crypto accessible by financial institutions, depends on what kind of market structure eventually dominates.
Will it be centralized exchanges, DeFi, OTC like with foreign exchange, or some hybrid, with centralized front ends running on DeFi rails? Which stands to remind us that it’s not a given that crypto firms embrace FIX messaging and that’s that. There’s no quick fix to institutionalizing virtual assets.