Building a wholesale crypto marketplace
Pure Digital is Building an FX Infrasture to Make Crypto Adoption Easier for Banks This week on Meet the Founders, our host Paul Gordon was joined by the founder of Pure Digital, Campbell Adams and CEO Lauren Kiley to discuss the wholesale marketplace that the…
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Pure Digital is Building an FX Infrasture to Make Crypto Adoption Easier for Banks
This week on Meet the Founders, our host Paul Gordon was joined by the founder of Pure Digital, Campbell Adams and CEO Lauren Kiley to discuss the wholesale marketplace that the company is building.
As banks and other financial institutions begin to engage with crypto assets, certain barriers remain that may still prevent them from entering the market. Having witnessed the evolution of a similarly fragmented digital FX market from the 1980s onwards, Campbell and Lauren are leveraging on their experience to build a marketplace for trading crypto assets.
The Experience of the Team
(00:39) With over three decades of experience from the top-tier sale, buy and vendor institutions of FX markets, in what he calls the “mad 90s”, Campbell believes he’s got a reasonable understanding of the market structure and what’s needed to have a wholesale market function properly from a trader’s perspective.
Ten years ago, the award-winning ParFX platform was designed by him with a consortium of 12 banks, aimed at creating a system of electronic trading that would bring more efficiency and transparency in the FX space and raise its quality bar.
(02:11) A previous sceptic of smart money, he had to educate himself and eventually became a convert, Campbell said.
“…it’s impossible to ignore the limitless use cases that smart money will bring the world,” Campbell acknowledged.
To build a proper functioning market for the crypto industry, Lauren was brought on board as CEO to help build out the brand.
The bulk of Lauren’s experience comes from traditional finance, having spent 10 years in foreign exchange at Morgan Stanley. The transition to the crypto space, she says, is a natural progression for many in the FX space.
What Pure Digital Does
(04:23) Pure Digitals’ methodology is to transplant the proven and robust foreign exchange infrastructure into the nascent crypto trading environment, not necessarily for institutions but a wholesale market.
(04:42) “We have introduced a wholesale exchange of risk and price discovery. Both of those are missing at the moment in the crypto markets. It is fragmented. It is retail-driven,” Campbell said.
Most venues of the crypto markets have a very big concentration of risk on their platforms because they juggle several core functionalities like custody and connectivity of money which makes for a capital inefficient model, Campbell believes.
(05:24) “What we are bringing to the table is a bilateral trading model proven for decades in the foreign exchange markets….and it doesn’t fall over because credit is under the control of the user. It’s not under the control of the third-party exchange,” Campbel said.
Getting Banks on Board
Both Campell and Lauren are leveraging on their past experiences working with banks to convince them to participate in this initiative. Interactions are also being made with the buyer side who have already shown keen interest to get them to incentivize the banks to start offering crypto, Lauren added.
How It Plans To Grow Liquidity
From Campbell’s experience in the mature FX market, growing liquidity is quite a challenge. Initially, you have to rely on liquidity providers and market makers but ultimately, you don’t need them, Campbell noted. There is certainly a very full pipeline of market-making interest in an environment like ours through the prime business FX market business model, which Pure Digital is adopting.
(08:54) “So they will already have a long-standing relationship with their FX trading bank. They will just add another page. They’ll have direct market access, creating in the name of a bank with their name divulged on the tickets. Everyone sees each other and the credit relationship is still kept when the bank…there’s no disintermediation of credit relationships, which is a really important thing for the wholesale market,” Campbell said speaking of the market makers.
This is important because the minute you get this disintermediation, their fiduciary duties with regards to how they direct a marketplace breaks down.
Partnership with State Street
Pure Digital announced recently a partnership with State Street to use their Currenex platform as the technology behind its trading architecture.
(09:44) “It kind of felt like a perfect fit to us really because they’re one of the top providers in the FX space, they’ve been around for decades, all the banks are already connected to them and much of the buy-side as well. The tech has already been built and is ready for testing,” Lauren said.
State Street has also agreed to explore the digital asset trading space with Pure Digital as part of the initiative. While Pure Digital may consider State Street as a custodial solution, Pure Digital is custodial agnostic, and are open to any bank or bank-grade institutions willing to join its initiative, Lauren added.
Navigating Regulations
The company has applied for FCA registration and says its DNA from the business model and market structure was driven by input from regulators from day one.
(13:53) “The way we’ve built it, we look like an MTS actually, and regulators will be very interested in our business model…because it raises the quality bar, but also makes everything transparent, open and legitimate,” Campbell added.
(14:14) Pure Digital desires to see a business market environment with highly regulated trading entities that is transparent and to finally give the banks a vehicle to address the regulators as a group in the format that the regulators like.
The Roadmap of Pure Digital
In the next few months, Pure Digital will add to the letters of intents it has signed with some banks, keep testing the technology and hopefully launch it in the second half of this year.
Pure Digital is not fazed about the recent interest in the prime brokerage space, and they think there’s more room for innovation.
(17:55) “I do think the prime brokers out there are not a big bank, big balance sheet, prime brokerage. It’s more an aggregation, so the market is missing the big balance sheets,” Lauren noted.
Will Pure Digital Be Raising Money Again?
(19:29) As done previously at ParFX, Pure Digital is proposing a model for where the partner banks will become investors in the platform.
“I always find it a better system that investing in a product you consume means that everyone’s intentions and motivations are aligned,” Campbell said.
How it Differs from Exchanges
(20:16) As a marketplace, Pure Digital sees itself as a conduit for the exchange of risk, price transparency and price discovery.
(20:35) “…in the seventies and eighties, FX was like what crypto is now. It was very fragmented with lots of voice brokers, with lots of different prices. And there was lots of arbitrage going on…And that’s kind of the sign of an inefficient market. The more arbitrage you have, the more inefficient” Campbell said.
What Cryptocurrencies Pure Digital Would Be Focusing On
Pure Digital would start with bitcoin and perhaps the top 5 market cup cryptos but are more flexible to look into other options depending on the market demand from the banks and underlining clients, Lauren noted.
The efficiencies of a stable coin are remarkable for the FX industry, with lots of use cases and Pure Digital looks to explore that in the future, Campbell added.
The Possibilities of the Future of the Partnership with State Street
There is the potential to see crypto and traditional currencies sitting by side-by-side on traders screens in the future, in the same way as goals sit on screens of FX traders.
(22:50) “It’s a cross between a commodity and a currency…some banks are confused about whether it’s equity, a commodity or a currency, it’s a mixture of all three. It’s really fun to see everybody juggling this sort of understanding of it. It’s creating its niche” Campbell said speaking about cryptocurrencies.
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