A growing number of financial institutions including high-frequency-traders (HFTs), hedge funds, asset managers, retail traders and brokers, are increasingly taking note of digital assets – such as as crypto-currencies, tokenised assets or smart contracts – and the disruptive market infrastructures that support them.
Among them is BlockEx, a digital asset issuance and trading platform that is protocol agnostic and capable of plugging into any blockchain operating model. Furthermore, it can bridge the gap between traditional and digital assets and trading venues and help boost automation. This can be attained through its ability to tokenise existing financial assets for trading on BlockEx, as well as two-way reconciliation.
In short, BlockEx is an exchange that enables financial institutions to issue or trade assets using blockchain technology. This is a feature that has proven highly popular among asset managers and HFTs, who are enthusiastic about running their own algorithms on BlockEx.
There are a number of other benefits. Direct Market Access (DMA) can be challenging for smaller financial institutions. For example, a sovereign debt issuance may have a minimum buy-in for institutional investors of $1 million. This is purely because it can be an administrative challenge to handle huge volumes of investor buy-ins for certain issuances.
Blockchain can break down these issuances into smaller unit sizes and enables the process to be completely automated. In other words, a BlockEx enabled platform permits smaller financial institutions such as retail traders, family offices or SME hedge funds to have DMA with issuances they may not normally have been able to attain exposure to.
One of the challenges faced by blockchain platform providers is that many are run by hobbyists without the appropriate infrastructure and governance to reassure institutional clients or prospects that the technology is safe and secure. Having robust governance and security, as well as being able to ensure undoubted safety of assets, is core to any blockchain platform, particularly given the spates of costly cyber-security breaches around smart contracts and high-profile bitcoin thefts.
Equally, demonstrating a robust know-your-client (KYC) and anti-money-laundering (AML) set-up, which meets the demands of institutional entities in all major jurisdictions, is critical. If platforms do not properly address these concerns, the technology will struggle to get a foothold as financial institutions with fiduciary obligations to shareholders and investors will not want to incur avoidable risks transacting on unsecure exchanges.
The challenge for any exchange or challenger exchange in traditional financial services is attaining liquidity. A failure to provide liquidity to users will ultimately result in an exchange’s failure. BlockEx is capable of handling sizeable volumes, and has an institutional set-up. One of the criticisms of many blockchain providers is that they lack scalability, and this is something BlockEx has addressed. It has the ability to meet peak volumes in volatile markets.
Having a pooled liquidity exchange provided by brokers and other financial institutions has enabled BlockEx to attain critical mass. This pooled approach means that it did not need to acquire customers individually as is the norm at most exchanges. The latter approach can be time-consuming and costly, and debilitating to the business.
Perhaps one of the biggest selling points is transparency. Operating on a blockchain exchange is not only highly transparent, but can help enable financial institutions to attain best execution, a core requirement under the European Union’s (EU) Markets in Financial Instruments Directive II (MiFID II) which will be introduced in January 2018.
The immutable structure of blockchain will also assist financial institutions with their regulatory reporting, such as MiFID II transaction reporting or over-the-counter derivative (OTC) and exchange traded derivative (ETD) reporting, which is a prerequisite of the European Market Infrastructure Regulation (EMIR). It will also help firms keep on top of their securities financing transaction reporting obligations, as mandated under the EU’s Securities Financing Transaction Regulation (SFTR).
The move towards blockchain compatible systems is gaining traction at asset managers and other financial institutions. Education of asset managers and their end clients must be a priority for blockchain providers. The technology has major benefits for traders, and highlighting its potential to this segment of the financial services industry is essential.