What is a Crypto Institutional Desk and What Does it Do?
An interview with Pamela Draper and Shane Thomson of Bitvo
Today I’m having a conversation with Pam Draper and Shane Thomson of Bitvo.
The discussion is around institutional trading at a crypto exchange.
In this two-part interview, we cover how institutional crypto is similar and different from traditional finance, the advantages of financial experience in an entrepreneurial environment and regulation. We will also delve into what will drive adoption amongst large institutional asset managers from the traditional financial sector.
Pam Draper is the President and CEO of Bitvo. Her background includes 14 years of Corporate Investment Banking at BMO and CIBC. She is a graduate of the Richard Ivey School of Business at Western.
Shane Thomson is the Head of Cryptocurrency Trading at Bitvo. Shane was a Corporate Foreign Exchange Trader at Cambridge Global Payments, an Energy Trader for Capital Power Corp and an equity research associate at TD Securities. He is a graduate of the Haskayne School of Business at the University of Calgary and is a CFA charter holder.
Bitvo is a cryptocurrency exchange founded by experienced Canadian financial entrepreneurs. Launched in 2018, Bitvo offers a state of the art trading platform, proprietary air-gapped cold storage security, the Bitvo Cash Card and the Bitvo Same Day Guarantee.
*This is part 1 of 2. For part 2 go here
Tristram Waye (TW): So why don’t we start by having you both tell me a little bit about your backgrounds?
Pam Draper (PD): Prior to becoming the President and CEO of Bitvo, a Canadian cryptocurrency exchange, I started my career in corporate and investment banking, first at CIBC for six years and then at the BMO for almost 8 years. I left investment banking to become an entrepreneur at the soon to be founded Bitvo in early 2018.
Shane Thomson (ST): I went to school at the University of Calgary Haskayne School of Business, where I obtained a finance degree. I earned my CFA after that. My career began at TD Securities in equity research. I then moved to power trading, followed by foreign exchange trading. Pam reached out to me through contacts she had in the foreign exchange world to see if I’d be interested in heading up the trading desk for a Bitvo. And after talking to her and seeing the growth potential in crypto, I joined her at Bitvo in 2018.
TW: Now, I understand you have a strategic relationship with DC Bank, which is run by Jeff Smith, a serial financial entrepreneur. How did you meet him?
PD: I met Jeff Smith when he was founder and CEO of DirectCash Payments and DC Bank. We did a lot of investment banking work together. Eventually DirectCash Payments, a public company, was sold and Jeff continued on to run DC Bank.
Based on our business dealings together, he asked me to come to Calgary and work on his next fintech startup idea. He wanted to develop a cryptocurrency exchange that was more secure, reliable and provided faster access to fiat than existing exchanges. That was the idea behind Bitvo.
I had worked with Jeff a long time and was excited by this emerging industry. So I agreed to join him.
TW: How did the idea behind Bitvo evolve? When did you get started?
PD: We decided to build this business by taking a different approach to the space than taken by others. We drew on our backgrounds in traditional financial services and expertise in fintech payment processing to develop our version of next-generation finance.
We wanted to build a business combining entrepreneurial drive and experience from fintech, and adding to that the professionalism, reliability and security that the best people in finance adhere to. Our strategic relationship with DC Bank added another unique layer to our offer.
I agreed to join Jeff pretty much New Year’s Eve 2017. During the first six months of 2018, I moved to Calgary and worked with our team to build the platform. We did our soft launch in June of 2018 followed by a full launch to the public on August 1 of 2018.
With a year under our belt, our operations have been ramping up every month. We’re very pleased with the progress that we’ve made so far, and look forward to the rapidly changing environment in the space.
TW: That’s great to hear. Let’s talk about institutional investors in the crypto market. What is an institutional investor in crypto?
PD: Right now, when we refer to in institutions, it’s either crypto corporations or high volume crypto traders in the space. These institutions can be Bitcoin mining companies, crypto brokerage firms that trade crypto on others behalf. They can also be crypto funds that are plugged into a bunch of different exchanges running trading strategies across different crypto exchanges across the world.
ST: High volume traders are sophisticated traders who have substantial resources and trade more frequently than the average retail trader.
TW: How important is the crypto-focused institutional participant in this market?
ST: They are definitely the backbone of the system. Some of the players have been working in space for quite a while, including various miners and investors. Having said that, this group is small relative to all the institutional money out there. But interest continues to grow, and with the growth in interest will come the maturing of this market.
TW: Outside of crypto-based businesses, what if any involvement does the more traditional institutional investor play in this market?
PD: Large traditional financial institutions are not yet directly involved the crypto space in a material way. Certainly not the largest traditional finance entities. They’re not holding crypto assets.
Where we see the future of our institutional business is the eventual involvement of these traditional asset managers. Our institutional approach is designed to provide service to both the newer crypto institutions and the more traditional financial institutions. We see this as a huge opportunity. And we have the kind of institutional experience and knowledge that these asset managers expect.
If you think about the amount of money that the traditional financial sector controls and the fact that they have virtually no exposure to the space, even half a percent of their total AUM into the crypto space would be substantial.
TW: They have no exposure?
PD: There are institutions like Fidelity that have what I would call indirect exposure. Fidelity has been very public about making various investments in the space. They are building a digital assets custodial business. They have been buying exposure to crypto through investments in various other crypto businesses. But it’s indirect because they don’t actively trade the crypto assets. They don’t actively trade any Bitcoin or have a position in Ether, for example.
TW: What are the factors that have been holding back the traditional financial institutions from joining the crypto market?
ST: From my vantage point, it seems to come down to two major things. One is the understanding of crypto. The other is trust.
Back when I traded energy and forex, I was aware of Bitcoin but didn’t understand why it was important. When you are used to markets with rich and well-established fundamentals, it takes some time to wrap your mind around something like this. This is the process many are working their way through. So I think this barrier is now slowly eroding.
A second barrier is trust. This barrier will be addressed as government regulation comes out, and as insurance products are developed and are more readily available. We see these as key to more traditional financial institutions having a higher degree of comfort with crypto.
In the meantime, at Bitvo, we are addressing this trust gap by making sure our support team is known, available and accessible. The personal part of the financial business is key at many levels. The personal trust factor goes up exponentially as the amounts of money involved increases. So we have made customer communication and responsiveness a core principle of our business.
PD: All asset managers in traditional finance have rules that govern what they can and cannot be invested in. One of the overarching themes for most if not all of these investors is a professional level custody solution like the one that Fidelity Digital Assets is building.
Other than Fidelity, there’s no one currently developing this key solution on a large scale other than maybe Bakkt. And traditional institutions tend to be very risk-averse when it comes to things like this. So before they would be willing to commit resources, a proven custodial solution that meets some level of regulatory standard needs to be available.
Then there is the insurability of crypto assets in custody as Shane said. The insurance market for crypto assets is still very new and in the development process.
Another issue is market depth or liquidity. These markets are growing, and liquidity is getting better every day. But we’re only just getting to a level of custody, insurance and liquidity where it’s starting to look more attractive to the traditional institutions.
One big challenge has been the very public negativity surrounding crypto at times. Negative headlines have created a big problem for investors and managers with fiduciary responsibility. That being said, many financial innovations have to deal with problems like these when they are relatively new.
However as the whole industry grows and evolves, and as professional standards are established, I think it’ll be easier for them to get their heads around it.