For all its frenetic growth in the last couple of years, the cryptocurrency ecosystem is still largely dominated by retail investors. This has resulted in thin liquidity volumes and high volatility. While the latter is an opportunity to make money, the crypto market’s sudden price swings have spooked investors. Most importantly, they have kept institutional investors, who bring liquidity and trading volumes at major exchanges, away from tokens. No wonder then that a recent report found that a significant amount of trading volume at cryptocurrency exchanges was found to be fake.
Graham Rodford, CEO of Archax – a forthcoming exchange targeted at institutional investors, has a solution to the problem. “The crypto and security token environment lacks credible counterparties,” he says. To that end, Archax is positioning itself as a solution to the counterparty crisis afflicting crypto markets. It has applied for license as a Multilateral Trading Facility (MTF) from the Financial Conduct Authority (FCA) in the UK and is in talks with seven market-makers interested in crypto. Recently it raised seed investment from Bletchley Park Asset Management, a Jersey-based blockchain investment firm.
Dealing With Regulatory Issues Relating To Security Tokens
Cryptocurrency tokens have landed in hot water in multiple jurisdictions due to the absence of clarity regarding their regulations. Archax plans to sidestep those issues by listing only security tokens or tokens that are backed by real-world assets and deemed as securities by authorities. The FCA has already released guidance relating to cryptoassets in January and created a regulatory sandbox for testing security tokens. “This means that the framework is already in place for security tokens,” says Rodford, adding that the agency has not been affected by negative press and asked all the right questions. “In our discussions with forward thinking regulators like the FCA, we haven’t received any unduly negative concerns around security tokens. They are extremely knowledgeable about the space and are taking a very pragmatic approach,” he said.
But Rodford admits that the classification of cryptocurrency tokens as securities means that compliance and listings costs for companies issuing such tokens at exchanges will multiply. This is primarily because securities are required to make significant disclosures regarding their financial state and have periodic reporting responsibilities. Added to those costs are the expenses for legal compliance and consulting for firms looking to tap a global audience at exchanges for security tokens. Still, Rodford is sanguine that a multiplication in the numbers of firms involved in crypto investment will bring further regulatory clarity to the ecosystem.
Meanwhile, the exchange is gearing up for a launch during the third quarter of 2019 with 20 to 40 security tokens. Among these tokens are a property platform for housing in the UK, a US-based fund of funds, and a real estate play in South America.
Decentralization and Archax
Proponents of security tokens and cryptocurrencies claim that they will fractionalize (or divide) real world assets for investment by retail investors. But that future will take a while to occur. Archax’s tokens will be available only to large financial institutions. “It’s not that we don’t want to target retail investors but our controls and processes are customized and targeted at institutional investors,” explains Rodford.
Establishing a counterparty for crypto trades may be a good idea but it centralizes operations and goes against the decentralization ethos of cryptocurrencies and blockchain. But Rodford thinks that centralization is necessary. (He is not alone in thinking so.) “Securities need to be traded amongst appropriate investors, and institutions very much want to know that the counterparty to a trade has been properly assessed before the transaction takes place,” he explains and adds that decentralization is difficult to achieve while remaining compliant. The performance of decentralized exchanges, according to him, has not been up to par, according to him.
“The Archax exchange leverages the best of both worlds – the performance, resilience and throughput of a traditional exchange, coupled with the post-trade efficiency and cost-savings that blockchain presents,” he says. Rodford is enthusiastic about the future for security tokens. “We believe that every asset in the world will be traded on the blockchain from illiquid property to funds,” he says. “It will take a little while to build out the infrastructure but it will happen much quicker than people anticipate.” According to him, medium-sized companies will begin listing security tokens in three to five years and it will become the preferred form of listing in 10 years.