P&L Talk Series with Genesis’ Dan Torrey

In May, Genesis announced its acquisition of Vo1t, an insured digital custody service, to complement its existing lending and OTC trading businesses, and enable it to launch Genesis Prime Services, a one-stop-shop for trading, lending and securing digital assets later this year. Julie Ros spoke with Dan Torrey, head of institutional sales – Americas, at Genesis, about recent developments in the space.

Julie Ros: A few years ago, the general feeling was that, in order to attract institutional investors, crypto world needed custody solutions, credit and prime broker (PB) services. Today, it seems like the industry has made some headway in each of these areas. As someone who came from traditional FX world, now on the crypto side, what are your thoughts around the differences between fiat and crypto PB services?

Dan Torrey: At Genesis, we’ve been working on this project at least conceptually for more than two years. What we’ve been hearing from our clients is that there is definitely a clear need for a full range of prime brokerage services for trading firms and other institutional investors and players in this space.

Like anything else, it’s about building a better mousetrap to solve some of the problems that exist in crypto. Unlike in FX, you don’t have real prime brokers today – you definitely have limitations on the availability of liquidity and credit for players in the space, particularly when they need to execute across multiple venues and exchanges to get their liquidity needs done – whether that’s spot or derivatives.

Once you get beyond spot, the need for leaning on a PB’s balance sheet grows even higher. So our clients, who are market makers, professional trading firms, crypto native hedge funds, miners, high net-worth Individuals and family offices – everybody who trades, invests, borrows and lends in the space and therefore have custody and clearing needs – are looking for a one-stop shop. But there’s nothing like that out there today. You have some innovative technology players who have come out with a better toolkit for electronic trading – which again looks a whole lot like what we saw evolve in FX over the last 20 years, including aggregation of feeds, smart order routers, a single order book, minimising transaction costs and slippage. On the e-trading side, you now have folks introducing algos in crypto – again, copying other established asset classes – and you have more people trading electronically.

JR: So investors in crypto aren’t already trading electronically?

DT: We still have a lot of clients who prefer to reach out for a manual RFQ and get filled that way. We don’t think that’s going to change fundamentally for certain subsets of our client base.

But beyond trading, today clients hire custody, then they want to put their capital to work so they need to take their digital assets out of cold or even warm storage, and then send it to an exchange. So you have some frictions inherent in that process and those include the costs involved, the fail rate, but most importantly, the time involved.

The nature of digital assets is such that there is still a trade-off today. If you were to hire a prime broker to trade on his books, and that prime broker also has a custodian and relationships and exchange accounts at all the exchanges and multiple OTC venues, and can offer you margin financing, allow you to gain yield on your assets that are ‘sitting in the account’ and/or can do extended leverage trades – if a PB can do all that seamlessly in one shop, that’s a very attractive proposition for clients. We want to marry the key tenets of custody, execution and financing, which combine borrowing and lending.

JR: Or what we in FX call credit, right?

DT: Exactly – which is still a big issue in the space. The way credit is managed, how affordable it is, the transparency involved, and just access – it’s still a relatively small asset class compared to all the other traditional asset classes.

JR: With inroads now in crypto custody and PB, what do you think should be next?

DT: If we look at the crypto lending landscape a few years ago, you had several established players in the retail space. But over the last year or so, some of the retail players, as well as newcomers, have entered into institutional digital asset lending. We see that as extremely healthy for the space.

So what’s next? It’s really married to services. This is a very new ecosystem, and asset class, but what we’ve got to do is put together a package of services that are going to give clients efficiencies of scale, operational flow, and capital utilisation. Folks are talking about cap intro in crypto today, but I don’t know if anybody is offering actual cap intro services to their hedge fund clients strictly within digital assets. We know folks are working on it and we are looking very closely at how, when and where we’d be able to plug that service into our PB offering.

Beyond that, we have to enhance and improve reporting, as well as risk management tools that historically have not really been present unless a shop builds it themselves.

JR: In terms of increasing interest by the institutional sector, there are people from the traditional world of finance now trading crypto that are often heard saying that institutional investors should be investing in crypto. I always wonder if they’re just talking their book. I suspect you’re going to disagree, so what is your take?

DT: I think it’s a very fair question given that it’s 2020, and there were some people in 2018 talking a lot about expectations or the expansion of the institutional investor class into this asset class. Clearly, the lesson of the last couple of years, has been that we built it and they have not yet come – at least with the volume and the frequency that folks were expecting. I tend to be an optimist. About a month ago, Paul Tudor Jones publicly discussed why he feels Bitcoin is an important asset to include in a diversified portfolio. I personally feel that was a validation, and think it resonated across a much broader swath of the community than previous comments. He got people’s attention, and the repercussions of just that one announcement are going to be felt in the next two quarters in the form of more family offices coming in, which have really been some of the early adopters in this space, going back to 2011.

We also want to see more hedge funds getting involved, as well as more plan sponsors – at least asking questions and trying to understand to what extent they might want to invest in the blockchain/DLT space. We want to see the RIA [registered investment advisors] channel get more involved. Everybody in institutional crypto is really focusing on growth through these different distribution channels, which are extremely important – they’re hitting different segments of the institutional investment audience. We have not seen this transition from a trickle to a real steady stream yet, but I see some very encouraging signs.

JR: That leads nicely into my next question. We’ve seen non-banks, some hedge funds and family offices involved, but we haven’t seen the global banks. Is this because of AML/KYC issues? Is it reputational risk? What do you think it would take to get these banks involved? Bank of New York and State Street have done some work on the custody side, and JP Morgan is working on its coin and blockchain. But none are trading crypto.

DT: I’m glad you finished with that part, because it’s an important question. When we look at traditional Wall Street, the role of the sell side is paramount. Without it, you would have certain asset classes that never could have evolved to the point they’re at today and technically could not be properly serviced. If you’re asking, will banks get involved in the near future or even medium term, I think the real question is why and where banks will get involved? The trust banks – for whom asset servicing is a very important part of their product mix – are all looking at how blockchain and DLT can give them efficiencies on the back-end of trading various assets, but also looking at whether or not they are going to jump into the space and be ‘players’.

And you’re right – the custodians are looking at it because they’re getting increased requests from clients, but they know they have some time on their hands. They don’t have to roll this out right away. I’m guessing that none of them want to be first, but none of them want to be last.

Getting back to the trading side, I think for any large, global sell side bank, they have to measure the reward versus the risk reputationally. Let’s face it, I love this asset class. I’m in this industry to stay. But if you’re Goldman, how much money can you make off of crypto execution in 2020 within the scope of any other asset class that you provide?

That said, we are seeing banks get involved on the private wealth side in places like Switzerland, but we are also seeing involvement in terms of the offerings – cash services, cross border payment services, maybe something close to custody – and some are in places like Canada and Japan. In Japan, they may not make a lot of noise, but they are pretty far ahead of the curve. As far as understanding digital assets and the role they’re going to play, there’s e-commerce going forward at the mass consumer level, but also B2B – and these guys don’t want to be behind the pack, they want to be leading it in those parts of the world. I’m just speculating, but maybe it’s the American and European banks waiting to see what the Japanese and other Asian banks are doing.

JR: Do you think crypto is going to remain such that the more agile players dominate, or do you think it’s an eventuality that traditional banks will eventually get involved?

DT: I have fairly conservative expectations about the sell side becoming big players in the space over the next three to five years. I’d love to be proven wrong, but I think that across the rest of traditional Wall Street, we definitely need to see hedge funds get more involved, to get even more family offices, and it would be good to see certain niche players in the real money world start to choose digital assets as part of the portfolio in order to diversify risk – especially given the global macro narratives that are going on this year.

JR: Do you think stablecoins could lead to the traditional sector getting more involved?

DT: I do. The reason is – and I know that it seems like there aren’t enough high profile use cases out there yet – but I think that they are there. Some of them are just under the radar. The Ripple project and what it means to MoneyGram and now Western Union and the cross border remittance industry. Outside North America, examples can be seen in both the Mexican peso and the Philippine peso remittance markets, where you already have a digital currency (XRP) that is providing efficiencies and eliminating frictions and cost, and scaling slowly and becoming more prevalent. I think this can become a much bigger story in a couple of years, and that’s just one aspect of cross border payments globally.

Regarding payments, the average banking customer has to deal with daily inefficiencies. The process is full of friction and really expensive. Once you get outside of North America, that really becomes more clear. The use cases are everywhere.

So the next point is convergence. Crypto world needs to connect with legacy banking infrastructure and architecture. On-ramps and off-ramps need to be everywhere. They need to be cheaper. They need to be 24/7, and they need to become ubiquitous and people need to get better educated throughout that food chain as well. It’s happening, and in some parts of the world it’s already happened. We’re very bullish on stablecoins.

Julie Ros

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