Navigating the complex regulatory regime for a new financial services business is a difficult task on any day. Add crypto and digital assets into the mix and it becomes even more arduous.
Just ask Archax.
The London-based exchange, which had planned to open for business during the third quarter of 2019, has delayed its launch date to “later this year” to allow time for necessary regulatory approvals. Simon Barnby, chief marketing officer at Archax, says they are targeting a mid-year launch. According to him, the regulatory approval process should be complete within the next 4-6 weeks. The company will assemble the remaining pieces of its business and announce a specific launch date after approval.
Archax plans to become the first regulated digital assets exchange targeted at institutional investors in the United Kingdom. In the absence of clear competition, the company’s plans are still on track. But the timeline has shifted.
“They (regulators) don’t give you a firm date on when they will give you their final decision,” explains Barnby, referring to the process of gaining approval from U.K. regulators, notably the Financial Conduct Authority (FCA). Archax has been in conversations with regulators for about eighteen months. It has applied for a multilateral trading facility (MTF) license from the FCA and, also, regulatory permissions for custody of digital assets and a broker/dealer license.
A Complicated and Expensive Task
The process of dealing with regulators for digital assets trading hasn’t been an easy one. “It was complicated, expensive, and difficult,” says Barnby.
For a start, the nascent nature of cryptocurrencies and digital assets meant that it was difficult to find precedent or a match with existing financial products. “These days, people are more focused on companies, how large they are, where their money comes from, and what issues they have,” says Barnby. The crypto ecosystem, such as it is, is still populated by startups that do not have the size or heft of established companies within the financial services industry. For the Archax team, this meant explaining the operations of their exchange and its industry.
There was also the complex task of decoding cryptocurrencies for regulators. While the FCA was already “well-versed” about the ins-and-outs of cryptoassets, Barnby says his team had to teach them about the exchange’s specific technology and custody solutions.
All of this resulted in expenses adding up. Apart from ponying up the initial capital requirement of 730,000 EUR required for investment firms, Archax had to employ the services of expensive legal firms in order to make sense of the regulations, says Barnby.
A “Big Differentiator”
In a bid to corner the market for crypto businesses, certain jurisdictions, such as Malta and Gibraltar, have developed custom regulations for crypto and digital assets. Launching in a crypto-friendly location could have led to a quicker start for Archax.
But Barnby says U.K. regulatory approval could turn out to be a “big differentiator” for their exchange. In that respect, Archax is like Bakkt, which touts its end-to-end regulated exchange as a unique proposition in a largely unregulated industry. Archax has also established a relationship with ClearBank, one of the few banks to provide services to crypto firms in the U.K.
There is a reason Archax is dotting the i’s and crossing its t’s. “The type of customers that we are targeting tend to prefer venues regulated in key financing centers,” he explains. With its massive financial services industry, London fits the bill.
An Exchange for Tokenized Assets
Archax is focused on building an exchange for tokenized assets, meaning real world assets like real estate that are converted into tokens, and traded on an exchange. In a previous conversation, Graham Rodford, CEO of Archax, said they wanted to become a “credible counterparty” for digital assets.
While there has been much hype about the prospect of fractionalizing or dividing assets into securities, the market for such tokens is yet to take off. As such, the customer profile for Archax’s digital assets are not the big institutional investors, at least for now. They are the likes of hedge funds and private institutions. Barnby says that is expected to change in the future.
Meanwhile, it recently partnered with Polymath, a Toronto-based security token company, to support tokens created using Polymath’s ST20 standard on its exchange. Barnby says the company is targeting listing approximately 50 tokens on its exchange by the end of the year. “We can obviously support more (tokens) but we’ve arrived at that figure taking into account the considerable work involved in listing and supporting such tokens,” he explains.