Hayley McDowell: Tell me about Archax and what you are hoping to achieve with the launch of your crypto exchange.
Graham Rodford: Last year, myself and Matthew were working with the hedge fund Omni Partners which was institutional in everything it did, so we are used to investors coming in and checking processes. We toyed with the idea of establishing a crypto fund, which consisted of incorporating the fund, setting up the team and having everything in place to go ahead. But what we found was that the space really wasn’t evolved enough to handle true institutional money, and it would likely fail the scrutiny of most investors. We decided we have the experience with institutional processes and putting those in place to move into the space and set up the infrastructure so that it would be easier for institutions to get involved. At the start of this year, we gave our notices with the view that we would set up an institutional-grade crypto exchange and that’s exactly what we did. We brought on board David Lester from the London Stock Exchange Group (LSEG), and David Buckley from Redwood Bank as advisors, who very much had the same approach as us, in that they were institutional in everything they did and used to being under regulatory scrutiny.
It’s clear that there is demand from most institutions’ clients for crypto, but for an institution to truly get into this space they risk their reputation. They need to deal with trusted counterparties, and companies they believe have similar processes to the ones they are used to. That’s what we are trying to do in this space; become the trusted counterparty to those firms and allow them to express themselves in the way that they want, rather than dealing with the current incumbents.
Matthew Pollard: When Graham says trusted counterparty, I think of a few things. For an institution to participate they have to know that their money is safe and that the set-up of the business is concrete. Exchanges at the moment that are currently focused on retail have counterparty risk, and if you’re a client with an exchange, you are expected to have your money on the exchange. One of the things we’ve been looking at is a custody solution where the exchange does not hold any client assets. So when we think trusted, we think about having the hardware, software and the controls in place. At the hedge fund we previously worked at, we used to wonder what are the things we would like to see in place in order for us to do business with this counterparty? We have been carrying out due diligence on service providers in the hardware, software, exchange space and so on. A lot of crypto exchanges at the moment use matching engines that do a job, but they are nowhere near the level that we have come to expect in the institutional world used on exchange’s like the LSEG or the New York Stock Exchange (NYSE). So we’ve been talking to those firms to understand how their platforms can be adapted for this new asset class of cryptocurrencies.
HM: Which new clients specifically are you targeting at the moment and which institutions do you think could be the first through the gates of the crypto world?
GR: Our main focus is institutions and we are not targeting retail investors at all, but there may be some individuals that qualify to use the exchange. It’s banks, hedge funds, family offices and the brokerage community that we are really targeting at the moment. It’s not that we don’t think retail investors should have access to this space, we just think it should come through a broker model which is the world we are used to. We are speaking to many brokers at the moment, and a lot of them have demand from clients about crypto so they are looking at ways to give their clients exposure.
David Lester: The appetite from institutional investors looking to enter the crypto space is certainly growing significantly at the moment. They are looking for an offering like Archax to be there to do things the way they are used to, with a trusted entity to serve their clients. Some of the larger entities are looking at this space quite hard and I can’t imagine that there is any institution out there that isn’t at least carrying out some sort of study or investigative report into how they can get involved in crypto in a secure way. Some are further along than others, but slowly there is a critical mass evolving which will only get bigger. The timing is good, but these things always take a little longer than people think. Archax is just at that point really where we can embrace the institutional clients, talk to them and develop the services alongside their own thinking to put this together in the new marketplace in London.
MP: On the fund side, we know there has been massive growth in cryptocurrency hedge funds over the last 12 months. But we also know that there are traditional hedge funds, both in London and New York, that are starting to trade this new asset class. Their initial toe in the water has been the launch of Cboe and CME Bitcoin Futures products at the end of last year, and this has been the beginning. You have high-speed, quantitative-focused funds that are now trading crypto using instruments they have access to, so through the maturity of crypto, somebody that can build an exchange that those hedge funds can plug into and be familiar with is really important. They could potentially be a liquidity provider to the exchange, but also a high-speed fund trading on the exchange would really add depth to the market. Currently an exchange does not exist that those hedge funds can deal with, so that’s why we’re building one.
HM: The launch of Bitcoin Futures was big news for institutional investors looking at the crypto space. Would you agree that those products are a good way to open the door to those investors?
GR: Yes, absolutely. These are recognised exchanges with well thought out contracts that people are familiar with.
MP: That’s a key point, contracts that investors are familiar with. Those promote adoption and are a key part of the market maturing. The launching of those futures products, I think, is a perfect example of that. It was a really big step for the market. Just recently Cboe submitted a revised structure for a Bitcoin exchange traded fund (ETF), which is the next step. All signs point to this market maturing.
GR: Part of the problem was that it was non-existent, and suddenly it came out of nowhere with a lot to understand at once. For institutions to get their heads around the new custody, trading and wallets is very difficult. If we can bring that familiarity as much as possible, a lot like what we are trying to do, it makes that task of understanding a bit easier for those firms. It’s just like a traditional asset class, it can be held it can be traded, but there’s the wallet which is a bit different.
DL: The launch of Bitcoin Futures also shows that the regulators, the US Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), were prepared to take this seriously. Nothing will be listed on Cboe or CME without the authority from those regulators, and that work started more than a year ago. It shows that regulators in the US are thinking ahead and they are prepared to work with the exchanges to put these products out there. It was an important milestone from that perspective. Archax is also looking at tokenisation other assets, and securitising other assets, and you will find that this market is much, much broader than, for example, Bitcoin or Ethereum and so forth.
GR: David’s right, and tokenisation is not necessarily something we thought at the start but it became apparent over time how important it is. When we were at the hedge fund, we thought if you were launching a hedge fund right now, you can raise $100 million in the traditional way but there are two problems for the fund manager. It can be frustrating that investors can redeem on a monthly basis and the fund manager then has to recalibrate their portfolio, and from the investor’s point of view, they have to give 30 days’ notice to pull from the fund if they don’t like the strategy. If you can tokenise a fund, then you can create a 24/7 secondary market that investors can trade as much as they want, and the fund manager gains a permanent capital vehicle to raise the $100 million. Thinking through that, we began to realise the possibilities really are endless in terms of taking any asset in the world and tokenising it. Recently there was a painting where 49% of it was tokenised and sold, and there are currently several companies setting up property tokenisation funds. If you take every asset in the traditional world and tokenise it, you can create transparency, liquidity, a 24/7 market, fractural ownership, and it seems to be beneficial to every asset class. We aren’t seeing widespread adoption quite yet, but we are seeing widespread understanding of the concept. I believe this evolution will happen a lot faster than people realise.
HM: From conversations you’ve had with potential clients, what are the main concerns for institutions looking to enter the crypto space?
DL: I think the market needs to be and will be regulated so that firms can really trust the process and other participants need to be there to create that liquidity pool. Not just the processes around the exchange, the market surveillance or the regulation, but also having the tier one technology in place so that different types of participants can trade, from high-frequency traders right through to the more passive investors, on a fair basis. Our team is moving forward very much with that in mind. We don’t see much of that happening elsewhere. Of course there are exchanges in place for retail investors which have been there for a number of years now, but they have suffered a lot of reputational damage due to the immaturity of the market. Archax is being built from the ground up by people who have done this before using all the tools, techniques, software and processes from the traditional exchange marketplace.
GR: We are big believers in the regulation and we are used to operating in a regulated manner. There’s a small amount of money at play at the moment, but nothing compared to the amount it could be. When you consider that every traditional asset class can be tokenised, the scale that this market could reach is massive and I don’t think regulation will restrict that growth. It may stop certain people actively participating and trading in the space, but there needs to more regulatory clarity.
HM: Where do you see Archax and the crypto industry in five years’ time?
DL: For the past seven or eight years at the LSEG I was primarily driving the M&A there, which involves finding the companies, bringing them into the Group and so on. I would say the reason I’ve decided to be involved with Archax is because of it’s a similar spirited type of innovation in London that wants to embrace this emerging world and asset class. People often overestimate what can be achieved in a year, particularly in a heavily technology-dependant and regulated environment. So for the next five years, I envision it will be similar to a multilateral trading facility (MTF), alongside a set of token rules and reporting obligations. Archax has the ambition, the people, the understanding and the contacts through its advisory board which Graham has put together to attract those institutions. I think we will be further along the road than we can envision at the moment in five years, but less along the road than we envisage in a year, from my experience. But a lot can happen in five years, and from the conversations I have had and the understanding I have, Archax is well positioned to be one of the leaders in the global financial centre of the world.
MP: Something which David touched on earlier is truly building something from the ground up. The process of carrying out due diligence and research, putting a proposition together and then building it will take longer than we think. But it’s also about building it from the ground up so that an institution that is currently watching from the side lines with clients who want to gain exposure to this asset class know that this is a sandbox which is safe. For me, using the best technology and building it from the ground up in the City of London, whilst promoting the tokenisation of assets is key.
GR: There are definitely some things I know will happen over the next five years, and some things that I hope will happen. We will build the exchange and launch at the end of the first quarter next year, and it will be institutional-grade. I’m fairly sure the regulation will also exist by then and with global regulation, we will see widespread adoption and understanding of crypto from the general public. What I’m hopeful for then is widespread adoption of tokenised assets and for Archax to be the place to go to trade those assets.