For all the talk of institutionalising crypto markets, progress is slow – Colin Lambert talks to Campbell Adams, founder and CEO of Pure Digital about how he plans to accelerate the transformation
Although the end result in terms of hard numbers doesn’t really tell the story, the creation of the FX Pure trading platform, which evolved into the ParFX model, is seen by many as a transformative event in FX markets because it halted a decline in certain trading behaviours that were seen as unhealthy and restored a balance to the market. Key among the features that emanated from that platform was a form of speed bump, actually an order entry randomiser, a feature that is starting to work its way into the equities and futures markets – much to the displeasure of some.
The underlying premise of FX Pure was, therefore, to create a technology infrastructure in which speed was not everything and which improved the trading ecosystem for the professional market. “This is what I want to replicate with Pure Digital,” asserts Campbell Adams, founder of the FX Pure initiative and now CEO of Pure Digital, an institutional-grade trading venue for digital assets. “A venue on which institutional traders can exchange risk – a primary venue, a trading venue for banks to trade Libra if you like.”
The return of volatility and indeed the resurgent bull run currently being exhibited by cryptocurrencies will not harm the chances of the new platform achieving success, even if it will, by Adams’ own acknowledgement, still have to overcome institutional scepticism regarding the asset class. He is confident that can be achieved, however. “I think the timing is good for a venture like this,” he says. “Digital assets markets are very retail-driven, but I sense there is growing interest from the institutional space. This is something that has never existed before, this type of asset – a digital bearer instrument.
“There is a tremendous opportunity, not just to invest in a project that could transform how we look at digital asset markets, but also to shape those markets’ future and provide robust, secure and regulatory-sound access to a new asset class for customers”
“To really develop this asset class to its full potential, which means greater institutional involvement, we need to get the market structure right,” he continues. “At the moment there is no real price discovery mechanism in bitcoin for example, there are many exchanges, all with different rules and trading protocols and catering mostly to the retail trader, but no primary venue for institutional traders. It’s a bit like the tail wagging the dog at the moment and that’s where we come in, we are positioning ourselves to become that primary venue for crypto trading and hedging.”
Creating a primary venue requires buy in from a critical mass of the institutional market and Adams says the plan is to start where he knows best, with the banks – especially those that helped him build FX Pure. “If you think of the digital assets space as an inverted pyramid, with a horribly fragmented price discovery via a bunch of retail exchanges at the top, we want to turn it around. To do this we have built a trading platform and will be offering the banks, asset managers and non-banks ownership, governance and a voice in how it develops,” he explains. “It will sit at the top of the pyramid and then price discovery can cascade down to the end users, much as it does in FX.”
In that last statement, Adams divulges a key difference between FX Pure and Pure Digital. The latter is already built – it is not a concept that needs development funding, having already been seeded by a Scandinavian family office with interest in the digital space. Talking to him, one senses that Adams sees this as a critical lesson learned from the FX experience, where agreements had to be negotiated and formalised with multiple institutions before thought was given to the technical work of actually building the platform. “All the pieces are in place with all the bells and whistles that a trader would want in the technology architecture, like real time credit, and market data feeds via an API – underpinned by either a bank-run custodian solution, next generation self-custody or a third party solution like BitGo ” he says. “The next thing we’ve got to do is quantify the demand from the institutional side, whether it be the banks or the buy side. The way we are approaching this is we are going to the banks with the opportunity to participate and influence this potentially lucrative financial initiative.
To successfully create a primary venue will undoubtedly require serious backing from the institutional space, but it is here that sceptics have their voice heard – how will Pure Digital succeed where others have yet to? Adams accepts that banks generally can be conservative when it comes to backing new ventures, especially one with such a controversial and high-profile background as Bitcoin, but he feels that when the time comes, these institutions will need to be able to enter the market quickly. “That’s where Pure Digital comes in,” he explains. “I think that the time when banks will become interested in digital assets is fast approaching – already more and more big buy side firms are expressing an interest in the asset class and where their customers go, the banks will follow.
“Pure Digital has been built to meet this demand and is a turnkey solution so can be quickly and easily deployed,” he adds. “Pure Digital will seek, with its participating owners and governors, to gain regulatory credibility required for these institutions and therefore offer a real alternative to the existing exchange models. Like the FX model, our matching logic is primarily designed to promote intention to trade and eradicate excessive order update noise.”
“If hedge funds and other large investors are to access the market they should be able to do so most easily via a prime broker or custodian, as they do in FX”
Before getting to that stage, however, Pure Digital needs prices and liquidity. To help build this, Adams turned to former EBS, Reuters and XTX Markets staffer Jan Strømme, who in 2017 established a quantitative crypto trading firm, Alphaplate. Strømme became involved in the project – he is a director of Pure Digital and has been acting as an advisor to Adams – when the two men were discussing what Strømme terms “the urgent need” for a professional crypto trading venue for institutions. “We need to seriously enhance the digital assets market structure,” he says. “The processes in place currently around relatively simple things like onboarding are a shambles and that type of experience turns off the institutional player. There are also too many potential conflicts of interest in the crypto markets now, where many exchanges in effect acts as LPs, brokers/clearers, custodians and exchanges.”
The plan is for Alphaplate and other trading firms to stream quality two-way pricing onto Pure Digital.
“Pure Digital is a good opportunity for banks and buy-side to get together and form their own crypto trading venue, with solid regulatory oversight and operated in consensus,” he adds. “Banks customers are going to be asking them more and more ‘can I trade crypto with you, adding this financial instrument to my ISDA”?’ I think if the banks don’t jump on this opportunity, then perhaps the current dominant non-banks will see this as an opportunity”
Opportunities and Dead Painters
While Adams is keen to play down the role the actual price of digital assets plays in building interest in the space – “I actually think bitcoin is a conduit to a new, truly decentralised world – it’s a proof of concept” – it is hard to imagine that a rebound in bitcoin from below $4,000 to above $9,000 is the space of a few months won’t tweak some interest among investors, especially as hedge fund returns remain relatively subdued. This in turn provides opportunities for banks beyond their current trading businesses.
“There is an absolute scarcity in bitcoin, it sits with fine wine and art from dead painters as having a finite supply,” Adams argues. “A survey from Bitwise Asset Management recently found that 55% of financial advisors expect bitcoin to appreciate in value over the next five years and the median price at the end of that period is over $17,000 per bitcoin. This has to be of interest to institutional investors and prop traders.”
“If hedge funds and other large investors are to access the market they should be able to do so most easily via a prime broker or custodian, as they do in FX,” he suggests. “This avenue makes onboarding buy side clients to Pure Digital easier and makes it easier for them to trade – they only have to go to one place, which also may provide the KYC/AML function needed as well as Fiat Ramp-off/on. Prime Fees have been crushed over the last decade and a half in FXPB, but this is a new market could offer a new with a new fee avenue.
If Pure Digital achieves its target then it may not be overstating the case to suggest that this would be a transformative event in the digital assets world similar to the launch of Reuters Matching and EBS in FX in the early 1990s – a fairer and more transparent marketplace would result. There are undoubted questions of scalability in the market, although the Lightning network may help ease these, and the challenge of actually getting institutions trading cryptocurrencies should not be underestimated.
That said, Adams remains confident, noting that the current period feels somewhat similar to that of the non-electronic FX markets in the mid-1990s before the advent of the Internet. “There is a mountain to climb still and we are in the car park putting on our hiking boots, but it’s an exciting time,” he observes. “There is a tremendous opportunity, not just to invest in a project that could transform how we look at digital asset markets, but also to shape those markets’ future and provide robust, secure and regulatory-sound access to a new asset class for customers, and the time to take action is now.”