What is a Crypto Institutional Desk and What Does it Do?
An interview with Pamela Draper and Shane Thomson of Bitvo
This is part 2 of our discussion with Pam Draper, President and CEO of Bitvo and Shane Thomson, Head of Cryptocurrency Trading at Bitvo. For part 1 click here
Bitvo is a cryptocurrency exchange launched in 2018. Bitvo offers a state of the art trading facility, proprietary air-gapped cold storage security, the Bitvo Cash Card and the Bitvo Same Day Guarantee.
Tristram Waye (TW): So what is an institutional desk in the context of the crypto exchange?
Pam Draper (PD): For our business at Bitvo, the institutional desk does two things. One is that it is a source of liquidity for large orders. Which means we specialize in high volume and value orders. These orders range from $50,000 into the millions of dollars.
The second aspect is focused on service that can include order handling, block sourcing, and advice on order completion strategies. Managing large orders can be complex and getting great executions with size can be difficult in crypto markets.
After the transaction is completed and reported, we make sure that the institution’s coins get delivered directly to their wallet as fast as possible. Sellers have the proceeds of the transaction deposited to their bank account as soon as possible. This is where our payments expertise delivers.
The entire transaction process for institutions is designed to be high touch on our side.
TW: What are the key differences, if any, between a traditional institutional desk compared to your crypto institutional desk at Bitvo?
Shane Thomson (ST): Generally a crypto institutional desk is run similar to what you see in the traditional “old school” institutional desks. If I had to point to one major difference, it would be the way we deliver price discovery.
What I mean by that is, instead of having essentially one central marketplace or price, in crypto, price discovery is provided by a series of independent entities across the world.
Using an OTC (over the counter) type desk in crypto allows us to reach out to our multiple trusted counterparties to source, accumulate or distribute positions. It helps us provide informed price discovery for our clients. It’s a process. Generally, prices are similar across global markets, but when large orders are involved, a more sophisticated approach is required.
TW: What are the key challenges you are trying to help institutional clients within this market?
ST: As Pam said, the focus of an institutional desk is often to facilitate larger orders and provide guidance on how to do that, based on the client’s needs. So a key component is communication.
These clients may want to accumulate or distribute large orders which can involve slippage and significant price differentials. When you have big orders in a volatile asset, having access to a specialist to help you get it done can be an important advantage.
So we help by using our extensive relationships with trusted counterparties across the global market. This approach means we can effectively accumulate or distribute positions with the best overall price based on market conditions at the time. Sometimes that means breaking up an order into pieces. Other items that might mean spreading the order over the day or days. It all comes down to what the client needs.
TW: When these crypto institutions, the miners and large traders and others contact you what do they expect from an institutional desk? Is it similar to a typical traditional financial institution?
ST: The expectations are clear communication and trust. There needs to be an open dialogue so I can help the client execute whatever their strategy is.
For example, sometimes the trade is too big to execute easily based on market conditions. So, I may advise them that it’s probably better to spread the execution over say a couple of days. This allows us to ensure they get the best price across their entire order during our execution.
In another situation, the client might have an entry point or trading strategy that is based on a trigger. So the very best price may not be the first consideration in this case. Here I can help them achieve the desired position or outcome based on a clear execution strategy that we will implement for them.
So trust in an institutional setting means clear communication and open dialogue combined with market expertise and using regulatory standards.
TW: So you use standard best practices for client execution?
ST: Exactly. Although the industry isn’t currently regulated in many ways, we have built our business in anticipation that these regulatory practices will become the standard. And frankly, experienced institutional players expect this standard, especially the more traditional asset managers. It builds trust and credibility.
TW: How have you incorporated regulation into your business?
PD: We adhere to all AML, KYC, suspicious transaction reporting, as well as your typical trading execution standards and insider trading rules that a traditional financial institution would. All of that which is based on existing regulation for traditional financial asset trading platforms.
We’ve purposely used current regulation since day one as a part of our business. We believed from the beginning that regulation was inevitable, and we’re complying at the level we believe will be eventually be required. That level in our mind, at least at first, is the level of the existing financial institutions, bankers and traders. So essentially our mission is longevity. We are ensuring we’re around for the long haul by adopting these policies as a normal course of business well before they are required.
TW: The crypto business obviously has entrepreneurs, but it also has financial professionals like yourselves. Is there an advantage to one kind of experience or the other?
PD: It’s really a mix. There are people who have a similar background to mine or Shane’s – business school, then work in traditional finance before making the switch over to being crypto entrepreneurs. There are also serial entrepreneur types who have more of a background in crypto and technology than maybe anything else. Some have been at the crypto game for as long as it’s been around. Their expertise is often highly technical, not financial. But it’s these entrepreneurs that have brought this area to life.
The trend appears to be moving towards adding more traditional financial background types. I think that’s because, as the industry matures, there is a recognition that regulation is inevitable. It’s coming. So financial professionals provide expertise developed in regulated environments that will be useful as the industry matures and evolves.
Financial experience is now becoming recognized as a competitive advantage. If you are a large asset manager with billions in AUM, do you want to work with people who have no idea how your business works as a professional investor? Or would you rather work with people that understand not only the crypto space but your business because they came from it? So financial professionals with reputations and track records are increasingly seen as assets in crypto.
Now having said that, it’s the entrepreneurs in this space that bring youth and an open mindedness. They are nimble and open to changes and challenges. They can move fast. Entrepreneurs are often stifled in the traditional banking system. Banks are massive institutions with decades or centuries-old traditions. They have lots of bureaucracy making them slow-moving and strict, with layers of approvals to go through to get things done.
In an environment like crypto, talented entrepreneurs have room to spread their wings. The people with financial backgrounds help these entrepreneurs by guiding and shortening the learning curve in important areas like regulation and client interactions.
We’ve found this mix to be a tremendous asset at Bitvo. .
TW: How do you see the institutional part of the business developing, going forward?
PD: We are anticipating two things driving adoption in the near term.
First, traditional asset managers will start to add some exposure. This will likely come in waves but, for now, there is a reluctance by this traditionally conservative risk-averse sector to be first. The first ones will test the water with very small allocations. As the comfort level in the space increases, so will the allocations, which will change the dynamics of liquidity and volatility.
Part of that comfort level will be provided by regulation. Too many of the firms that have failed so far, would not have met any minimum standard of current regulation. There are others that will struggle and disappear once standards are implemented. But the tradeoff is that, for wider adoption, these standards will need to be present, which is where financial experience starts to become an asset.
TW: When you said that you built your business around the regulatory standard you expect to be implemented, what might that look like for crypto?
PD: In terms of regulatory approaches, we have yet to see what the Americans will do. There are other jurisdictions, like Bermuda, that have recently implemented robust crypto compliance regimes designed specifically for crypto.
It will be interesting to see where Canada comes out on that. Regulators in Canada are actively working on a framework for crypto regulation. We aren’t clear on whether they will adopt existing securities legislation or customize new legislation similar to the Bermuda approach.
Our view is that due to crypto’s unique characteristics and international significance, it deserves a new approach more like that of Bermuda. One designed from the ground up. There are certain elements of crypto that are not well served by existing securities laws. Simply adopting existing securities laws will create a strong incentive for regulatory arbitrage. Regulatory arbitrage will not only take the transactions with it, but also the innovation, development and entrepreneurial talent of crypto as well. These setbacks won’t be easily overcome once set in motion.
We are looking to Canadian legislators and regulators to take a grassroots approach and develop a regime truly for crypto. We have plenty of entrepreneurs, financial expertise and innovative capacity to drive development of this space in this country. We believe that those places that take this grassroots approach will have a significant advantage in the space going forward. Canada can and should be one of them.
TW: If people have any questions about trading with Bitvo, they can get in touch through the site?
PD: Yes, our contact information is available at Bitvo.com
TW: Pam, Shane, thank you for your insights today. Great to talk to you.
PD: Thank you.