Better crypto infrastructure is luring Wall Street
Illustration: Christopher T. Fong/Protocol

Better crypto infrastructure is luring Wall Street

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Wednesday: the crypto infrastructure opportunity, Coinbase’s “COIN” documentary, and SushiSwap’s plans to reorganize for more legal protection.

Off the chain

As people loved to remind me when I took this job, I’ve argued against the very term “fintech.” My main beef is that all modern finance is deeply technological. The latest piece of evidence: JPMorgan Chase’s plans to add thousands of engineers even as the economy softens. Citi has likewise touted its tech hiring plans. If a fintech startup is going to be worth that label, it will have to show it’s far better at the “tech” piece than the giants of the “fin” game.


— Owen Thomas (email | twitter)

Picks, shovels, and tokens

Despite a downturn in crypto markets, more large institutional investors are seeking to invest in crypto. One factor holding them back, though, is a lack of the kind of infrastructure they’re used to in established capital markets. That’s changing, as technology infrastructure for crypto starts to mature in areas ranging from security to data.

One area that’s being built out is crypto trading. Trading as a service is emerging, with APIs and other products that developers and companies can use to set up crypto trading for their clients.

  • The latest sign of this maturation is EDX Markets, a new exchange for digital assets that’s being developed by Wall Street players like Citadel Securities, Virtu Financial, Fidelity Digital Assets, and Charles Schwab, as well as venture capital firms Sequoia Capital and Paradigm.
  • The digital exchange, headed by former Citadel Securities executive Jamil Nazarali, is roughly modeled on and built on the trading technology of Members Exchange, or MEMX, another exchange that’s being developed by similar companies as an alternative to large stock exchanges such as NYSE and Nasdaq.
  • EDXM’s custody and wallet technology is being provided by crypto custody and infrastructure company Paxos, the companies announced Wednesday.

Big banks have a long list of reasons for not moving deeply into crypto. Those include accounting, risk, security, and regulatory concerns on top of a desire for more mature technology.

  • Paxos, which already serves customers like PayPal and Nubank, says EDXM could attract large banks. EDXM is “bringing traditional market structure and also traditional market participants to this liquidity offering through the exchange,” said Walter Hessert, Paxos’ head of strategy.
  • EDXM is also different from some other crypto providers that are the market maker, exchange, and custodian all in one, which can be a conflict of interest and is typically not done in traditional markets, Hessert said.

The competition in the sector is heating up. There’s already a wide range of services for institutional clients to tap into.

  • Coinbase provides crypto trading APIs, custody, payments API, and related services, seeking to lure big and small customers alike. It recently announced a deal with BlackRock to offer crypto services.
  • A number of other API providers like Prime Trust, MoonPay, Wyre, and Transak have emerged to offer quick and easy connections to crypto trading and other services. Custody providers such as Anchorage and Fireblocks also offer crypto trading. And others are jumping in: Stripe has announced products for merchants to pay out in crypto or convert fiat to crypto.

“The convergence we’re seeing in the industry is people are moving up and down the value chain, because competition has heated up,” said Sara Xi, chief product officer at Prime Trust. “So the more you cover in the value chain, the more revenue sources you have.”

Consolidation seems inevitable: Though Bolt’s deal for Wyre fell apart, DriveWealth acquired a smaller firm, Crypto-Systems. More deals could soon come in this sector, since numerous providers offer overlapping services, analysts say.

— Tomio Geron (email | twitter)

A version of this story first appeared on Protocol.com. Read it here.

A MESSAGE FROM ALIBABA

Alibaba — a leading global ecommerce company — is a particularly powerful engine in helping American businesses of every size sell goods to more than 1 billion consumers on its digital marketplaces in China. In 2020, U.S. companies completed more than $54 billion of sales to consumers in China through Alibaba’s online platforms.

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On the money

Crypto legislation has stalled out. Efforts to overhaul federal regulations for digital assets have "all but evaporated" in the lead-up to midterm elections.

A fund associated with the bankrupt Three Arrows Capital moved hundreds of NFTs to its liquidator. More than 300 NFTs were moved out of a crypto address associated with Starry Night Capital, the NFT-focused fund launched by the co-founders of the now-bankrupt Three Arrows, Bloomberg reported. Teneo, the hedge fund’s liquidator, confirmed that the move was part of its effort to take control of Three Arrows’ assets.

Mastercard has launched a new crypto tool for banks. Called Crypto Secure, the system uses AI to determine the risk of crime associated with crypto exchanges on the Mastercard payment network. The service is powered by CipherTrace, which Mastercard acquired last year.

The CFTC served Ooki DAO through a website help bot and forum post — and the courts are cool with it. A federal judge in California found that the Commodity Futures Trading Commission acted properly in submitting its charges against the decentralized autonomous organization through an online forum.

Coming soon to a (home) theater near you: Coinbase. CEO Brian Armstrong shared a trailer on Twitter for “COIN,” a documentary that will be released Friday about the history of the exchange and crypto.

The Consumer Financial Protection Bureau fined Choice Money. The CFPB is ordering the remittance company to pay a $950,000 penalty for not accurately disclosing money transfer fees, among other alleged issues.

Overheard

Is Coinbase softening its push for a single digital assets regulator? “We’re very supportive of two efforts, one in the House, one in the Senate, that would provide spot authority to the CFTC,” Kara Calvert, the crypto exchange’s head of U.S. policy, told Decrypt.

SushiSwap is considering redoing its legal structure to give DAO members more protection. “Simply calling an unregistered group of individuals voting on governance a DAO isn't going to fly, and that's what the newest lawsuits target,” the group’s newly elected "head chef" Jared Grey wrote on the organization’s Discord.

Just one question for …

Tim Barnett, chief information officer, Bluefin

Barnett worked as an engineer for the National Security Agency for a decade before launching his career in the tech industry focused on payments software and fintech. He joined Bluefin in 2011.

What was your biggest professional blunder?

Early in my career, when I was CIO at Nova (now Elavon), we made some really great technical payment products to connect companies to Nova over the internet securely for transaction processing. This would eliminate telco charges for dial or the need for a dedicated circuit. The problem was that they were too complicated for the sales team to understand, so they couldn't sell it because they didn’t know how. My lesson here is that no matter how great you think something is, if you can't sell it, it has no value. Don't commit the resources and expense to building a solution if you do not have an effective strategy to sell it. It’s important to make sure you have a marketable offering that isn’t too complicated.

A MESSAGE FROM ALIBABA

Using economic multipliers published by the U.S. Bureau of Economic Analysis, NDP estimates that the ripple effect of this Alibaba-fueled consumption in 2020 supported more than 256,000 U.S. jobs and $21 billion in wages. These American sales to Chinese consumers also added $39 billion to U.S. GDP.

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Thanks for reading — see you tomorrow!

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