Building Regulated Liquidity & Connectivity Services for the Crypto Markets
As the recent FCA clampdown on Binance in the UK has shown, regulators are taking an ever-firmer stance on crypto trading platforms. As a new wave of participants enter the markets, the need for service providers with regulatory compliance at their core will continue to…
As the recent FCA clampdown on Binance in the UK has shown, regulators are taking an ever-firmer stance on crypto trading platforms. As a new wave of participants enter the markets, the need for service providers with regulatory compliance at their core will continue to grow. On this episode of Meet the Founders, Guilhem Chaumont, CEO at FlowDesk, joined Paul Gordon to discuss their recent regulatory authorization out of France and how it will support the products and services they have developed.
Before crypto, Guilhem spent a year and a half as a derivatives trader.
He discovered digital assets during the boom of Ethereum when the overall market cap was just about USD 25billion. After he had turned huge profits from investing bits of money into crypto, he decided to build a company.
Together with his team of finance cofounders, they built a blockchain development firm with a focus on privacy-centric technologies. After experimenting with some innovative products, they went back to their initial interest, trading, and built Flowdesk in May 2020.
(02:38) The company initially built a data aggregation infrastructure for low latency and streaming live data. They eventually added trade execution for around about 45 exchanges before they built their first product for market making.
“We found out that there was a huge lack of liquidity especially for the lower market cap and, so we thought we would focus on that with an innovative offer which we call market-making-as-a-service. We provide the technology and the algorithm for clients to build their liquidity to some extent,” Guilhem explained.
Lessons Learnt Along The Journey
The first lesson learnt is that crypto is a very complex field, at the edge of a wholly new technological paradigm, Guilhem said.
Building in crypto requires deep expertise in finance, blockchain and related IT technologies for products that would be global from day one.
The second lesson Guilhem learnt was that things change very fast in the industry.
(04:38) “In four years, we have seen the ICO boom with almost zero fundamentals and, now we have DeFi and layer two solutions which are enabling new scalability so, it’s important to keep up with what is the latest developments,” Guilhem said.
Presently, the market seems to be going in the direction of DeFi but, in a year, that could change. The most important thing is to be agile.
Nascent markets are established on the foundation of retailers and consumers and gradually grow to cover business and large scale institutions. That evolution took place in the traditional market. The same is happening to the crypto market but at an even faster rate.
(06:18) “We were retail market focused during the last years and, we’ve seen a shift in 2020 and 2021 from our end. We are starting to have a significant
demand from more sophisticated institutional investors not only to have access to our market-making-as-a-service solutions but to have execution services to know how to spread trades around the world with the lowest latency and the most plug-and-play solution,” Guilhem said.
(07:39) Flowdesk is primarily a B2B firm with a majority of its customers being token issuers with market caps ranging from USD 1million to a few 100million. As the market grows, so that Flowdesk’s portfolio of customers get bigger.
(07:55) “We have seen demands from much bigger projects especially to tackle liquidity in the new markets which are mostly decentralised but also very local centralised markets in whatever the country you can think of,” Guilhem added.
Flowdesk’s major product is offering a plug-and-play solution that triggers liquidity in a few hours in the various range of markets.
With the new regulatory framework in France that the company has already applied to, it can offer a new range of services, ranging from custody, brokerage, amongst others.
Digital Asset Provider License
(09:45) Recently, Flowdesk received its Digital Asset Service Provider license in France. It was a long and stressful process that involved a lot of documentation.
(10:07) “Compliance and all these regulatory frameworks are here for good reasons. We need more regulation because we still have way too many scams,” Guilhem said.
Fully incorporated in France, has chosen the high way of ceding to regulatory compliance because it is in their DNA, Guilhem said. The company is committed to the highest level of regulatory compliance and believes that this achievement would give them some leverage as the EU works on consolidating regulations for the region.
With regulators like the FCA in the UK tightening the ropes on compliance and resisting Binance’s operation, a new opportunity is presented to emerging startups to see regulation as a core mandate of their operation and not an afterthought.
Frameworks help new companies to understand the domains within which they can operate, simplifies processes and more importantly gives assurance to clients that the company they are transacting with are regulated.
(14:43) Flowdesk is still levelling out its fiat component. Currently, it has partnered with companies in France and Europe, particularly in Germany and the UK to assist it. It is facing similar issues with custody and may consider full suite custody solutions like that of Ledger in France. As resources and funding become available, Flowdesk hopes to build some of these solutions in house.
Barriers to Entry for Institutions
Institutional clients are not able to take advantage of the full fleet of opportunities that crypto presents. They are only comfortable with what they already know which at this stage limits them to Bitcoin, Ethereum, futures and basis trading.
(16:42) “There is much more in crypto. There is the whole DeFi market, there is the way perpetuals work in futures markets, and there are a bunch of other kinds of interesting coins and products that are still out of their scope,” Guilhem stated.
Eventually, it is only a matter of time till their barriers are broken to allow for mass adoption across all the opportunities available in crypto for institutions.
Engagement with DeFi
(18:02) When Flowdesk started building its infrastructure, the DeFi market was practically non-existent and it quickly recognised its potential as a result of its rapid growth and opportunities for innovation.
Today, Flowdesk is aggregating data which plays a significant role in pricing the index of trades for its significant pools on exchanges like Uniswap, QuickSwap. On the side of trade execution, Flowdesk regularly harmonizes the prices between the decentralized and the centralized exchange.
Guilhem believes despite the massive strides that have been made in DeFi, a potential switch between centralized and decentralized would take time.
(18:42) “It would be a lie to say that tomorrow everything is going to be decentralized. We are going to have a bit of centralization in the decentralization and vice versa…It’s very important to keep these two things in parallel to get the best of both worlds to create a new ecosystem that would be much more healthy for the market participants,” Guilhem stated.
The argument of the need for a completely trustless financial ecosystem continues to persist. Like Guilhem, some proponents believe the idea of a full trustless system is a step too far. Even if it were what the market wanted, perhaps the solution would be to build a system that requires less trust but not to do without it altogether.
According to Guilhem, what the market needs to figure out is scalability to lower transaction fees and improve the speed to allow a much wider range of smart contracts. The market is particularly struggling with the scalability of derivatives
(21:15) “Derivatives are mandatory to build healthy financial markets. Derivatives need some centralization especially for the clearing parts and this is something that we need to replicate on the decentralized parts and that is a huge challenge especially when regulators are hesitant about derivatives,” Guilhem noted.
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