A new initiative seeks to help digital currencies shed their dodgy, Wild West origins and become acceptable to institutional investors. And in doing so, it could also facilitate the willingness of financial institutions to embrace blockchain, the infrastructure for mining and trading crypto-currencies.
Fraud at bitcoin exchanges such Japan’s Mt. Gox and Hong Kong’s Bitfinex, along with illiquidity and high volatility, have made banks and industry wary of alt-coins.
“Our vision is: that has got to change,” says Dave Chapman, strategy advisor for openANX, as well as COO at ANX International, a Hong Kong-based bitcoin exchange and B2B blockchain services company. The world is a long way from the sort of global regulatory regime to protect consumers that prevails in traditional markets, so ANX International has launched a fundraising for a non-profit effort, openANX, to develop the infrastructure to put the trading of bitcoin and other digital currencies on a more mature path.
openANX is an ecosystem that connects all of the other centralized bitcoin exchanges. The exchanges become local gateways – providing websites and customer service in local languages, linking with local banking systems, and handling compliance based on local regulation. But trading can take place with counterparties anywhere on the network, thus aggregating bitcoin exchanges’ liquidity, and introducing an element of credit analysis on counterparties rather than alt-coin investing focusing solely on market price.
And like in traditional markets, liquidity begets liquidity – an important requirement to make digital currencies a mainstream asset class.
Helping blockchain mature
“Bitcoin reminds me of what FX trading looked like in the 1990s,” says Hugh Madden, technical director for openANX as well as CTO at ANX International, and former architect of FX trading infrastructure at HSBC.
Local gateways could determine risk measures such as collateral requirements; individual players would post collateral in order to receive services; and local regulation would also impact a counterparty’s credit rating.
In another move toward traditional trading, a more liquid, decentralized exchange would enable bigger and complex trades to be first negotiated OTC, rather than on the blockchain (via what crypto developers call ‘state channels’, which in this case are executed through smart contracts using the Ethereum blockchain). Blockchain technology is bilateral and doesn’t allow for lending or repo, and it can be expensive, because creating the blocks to transact eats up electricity.
“It’s like an escrow service without any escrow,” Madden said.
Such an arrangement would allow the trading of alt-coins to more closely mirror trading floors of traditional banks: standardized orders are processed through low-touch algorithms, while big ones are voice-traded by human sales traders.
This also means more flexibility in providing a variety of pairs among crypto-currencies (such as a BTC/ETH trade), between cryptos and fiat (BTC/USD or ETH/JPY) and among fiats (USD/JPY).
However, this is all still meant to be conducted via blockchain, which brings very different properties to the table. Above all, such exchanges are ‘trustless’: the counterparties rely on the mining process in a blockchain to validate the exchanges and the ledger.
Almost as soon as bitcoin was invented, centralized exchanges popped up to enable their trading. However, these operate by having the exchange hold at least some of the assets. This has been necessary to ensure it can settle trades. But it has also made exchanges targets for fraud. Japan’s Mt. Gox (2011) and Hong Kong’s Bitfinex (2016) suffered hacks and customers lost millions’ of dollars worth of bitcoins; and unlike fiat money, stolen bitcoins are almost impossible to trace.
So a big problem that openANX wants to solve is to eliminate the need for a third party to hold on to customer assets. Instead, users would have to post collateral, asserting their solvency, in order to receive services.
“Our proposition for openANX is to build a decentralized exchange on top of the Ethereum blockchain,” Chapman said, speaking at a meeting of Ethereum enthusiasts. “We want to move from the current model of centralized bitcoin exchanges holding custody of your funds, to a collateralized-asset gateway.”
Chapman says the goal is to launch openANX in summer 2018. It involves a lot of technology development, legal and compliance work across jurisdictions, and, now, a marketing effort.
To finance the project, openANX launched an initial coin offering last week, that is slated to close July 17. (ICOs are venture financings raised via blockchain, like crowdfunding; openANX’s executives prefer the term ‘token sale’ of OAX, a bespoke digital currency.)
The foundation has already almost reached its goal of raising the equivalent of $22.5 million in OAX. Participants invest in the project using Ether, the currency of the Ethereum blockchain; openANX set the exchange rate of ETH1 to equal OAX478.68; based on the June 20 closing price of Ether, one coin equals $359.01. They are minting 30 million OAX tokens, which based on the above ratios, equates to $22.5 million.
Tech, legal, PR
Although not all centralized exchanges may want to join openANX, Madden says many peers would like to get rid of having to hold customer assets. Exchanges don’t get paid, and there’s no bitcoin equivalent of money-market funds to park deposits. And they live with the danger of a hack, a software bug, or an inside job to steal coins. “Holding a lot of customers’ crypto assets is really quite stressful,” he said.
Although bigger exchanges may prefer to guard their liquidity, rather than disperse it into openANX, they would have to maintain a staff to safeguard assets and maintain matching engines and other proprietary technology.
Participating exchanges, on the other hand, will be able to pool APIs and collaborate on innovation. And by expanding liquidity, exchanges can offer customers tighter bid-offer spreads and match multiparty trades.
Jehan Chu, managing partner at Jen Advisors, a venture firm focused on digital currencies, and an advisor to openANX, says the initiative represents a transition from bitcoin exchanges as purely commercial entities, into a blended model. “It is a new paradigm of public protocols, public technology and public software that is being used by proprietary, commercial organizations,” he said. “And it’s a Hong Kong story.”
NexChange, Horton Point launch digital asset market
The aim is to create an environment for investors to build and manage portfolios.
Asia-based blockchain venture firm NexChange Group announced a partnership with New York alternative investment firm, Horton Point, to launch a marketplace for the institutional digital asset management industry.
The Nexyst platform will provide access to a broad range of professionally managed, actively traded crypto strategies and passive investment solutions. Nexyst will debut its initial offering in October 2019.
Nexyst is created to provide better transparency and to improve investment decisions for institutional investors interested in the digital currency asset class.
The platform will enable qualified investors to perform online fund sourcing, due diligence and monitoring, and customize portfolios by a number of parameters such as risk, return, correlation and drawdowns. Nexyst utilizes proprietary optimization technology powered by Eleven Marketplace OS to deliver customized portfolio solutions to each investor.
Nexyst will also provide fund managers with integrated access to CRM, data room, behavioral analytics and customer engagement solutions for enhanced marketing and investor relations.
The Nexyst ecosystem is supported by an active global blockchain community developed by the NexChange Group. Horton Point is responsible for manager sourcing and due diligence. In addition to a transactional component, the platform will provide manager research, value-added content and tools enabling both sides to interact efficiently.
“Our goal is to create a one-stop platform where qualified investors and fund managers can actively engage with each other in a secure and compliant manner,” said NexChange Group CEO and Nexyst co-CEO, Juwan Lee.
The intent is to create an environment in which qualified investors can make informed decisions about this new asset class, said Nexyst co-CEO and Horton Point CEO Dimitri Sogoloff.
OKEx seeks global standards for crypto exchanges
OKEx seeks partners to develop a global self-regulated organization aimed at standardizing practices.
OKEx, one of the world’s largest spot and futures digital asset exchanges, announced an initiative to create a self-regulated organization (SRO) aimed at standardizing exchange practices and policies. Similar to the World Federation of Stock Exchanges, FINRA in the United States, and the World Economic Forum, OKEx is engaging exchanges and market participants in the global crypto-trading community to become members of this initiative.
This SRO will be an independent, membership-based organization that is neutral and open to exchanges of all sizes and jurisdictions. Member exchanges will work together to define and adopt standards that will promote digital asset adoption globally, educate governments and regulators, and develop metrics and criteria for trading, listings, and reporting.
“Cryptocurrencies are global and decentralized, and the industry remains nascent, thus regulations by jurisdiction are not enough,” said Andy Cheung, head of operations for Malta-based OKEx. “The only way for exchanges to grow and deliver impact is by joining together to develop practices and policies that will set a global standard and adapt to regional regulatory frameworks.”
Exchanges must clarify their operational practices and procedures in order to best cooperate with governments and encourage innovation in this sector.
OKEx invites other exchanges to join the company in establishing standards for market-making, listings, delistings of digital assets, and other items critical to the growth of the entire industry. Crypto exchanges share a common goal to protect investors and traders, and to foster innovation in the cryptocurrency ecosystem.
“While other organizations have introduced initiatives to elevate standards for crypto exchanges, most are focused on one jurisdiction. Our initiative is focused on creating a global SRO that can provide international standards,” said Enzo Villani, head of international strategy and innovation at OKEx.
SWIFT and HSBC to define API standards for Hong Kong
The new standard will ensure higher levels of interoperability and improve customer experience.
SWIFT and HSBC announce today they are joining forces to define a common industry standard JSON for APIs, re-using ISO 20022 components, the initiative will see the Hong Kong banking community working together to review and agree on this standard.
In July 2018, the Hong Kong Monetary Authority introduced its Open API Framework, to facilitate the development and broader adoption of APIs by the banking sector. Since its launch, over 500 APIs have been made available by the 20 participating banks.
The new standard allows merchants to setup direct debit authorization and initiate the collection instruction to bank on behalf of their consumers. This initiative by SWIFT and HSBC aims to avoid fragmentation on common use cases, speed up and ease API integration efforts and incremental investment for industry participants, and ensure interoperability with the Hong Kong Faster Payment System’s (HK FPS) underlying clearing and settlement system by reusing ISO 20022 as a standard.
ISO 20022 is already widely adopted by market infrastructures across the world, including HK FPS, and is set to become the new standard for cross-border payments in the years to come, making it a logical choice when adopting a new technology.
Lisa O’Connor, managing director, capital markets and standards, APAC said: “In recent years, the financial industry has moved from safe payments to fast payments, and is now embracing richer data payments as the world is moving towards Open Banking. In this context, the adoption of a common set of standards, such as ISO 20022, is a necessity to ensure interoperability between systems and reap the full benefits of Open APIs.”
Nadya Hijazi, head of digital, global liquidity and cash management at HSBC, said: “At HSBC we understand that the market is rapidly changing, with customers more technologically sophisticated and digitally oriented in their approach. We are thus committed to meeting the demands for an industry that is faster, more personalized and easily accessible. At HSBC we see immense value in defining an ISO 20022 JSON standard and have adopted these standards in our Treasury APIs for collections in Hong Kong.”