Fusion Digital Assets, the firm’s new institutional marketplace for spot crypto-assets, this week successfully completed its first XBTUSD pairs trade – highlighting the movement of institutional crypto-asset engagement towards more traditional and segregated models. Best Execution talks to TP ICAP’s Simon Forster to learn more.
The venue, which went live this week, has taken an alternate route to some other digital asset platforms by following an operational structure closely aligned to traditional financial markets – meaning that independent providers perform specific, segregated roles that cover trade execution, custody and settlement, rather than lumping them all in together.
The process starts with Fusion itself, TP ICAP’s proprietary electronic platform, which offers a non-custodial crypto-asset exchange for order matching and execution. The trade continues with Fidelity Digital Assets, a custodian that keeps inventory and offers settlement services through a segregated model. The FCA-registered venue offers anonymous aggregation of streaming liquidity from global market makers, as well as uncorrelated liquidity from the TP ICAP client base.
Trading is currently supported in Bitcoin and Ether against USD, although going forward it plans to expand asset range in line with client demand, as well as adding further custodians to develop a multi-custody model.
Trending towards tradition
The segregated model adopted by Fusion indicates a growing movement within the digital asset space away from the initial decentralised approach towards a more traditional structure, in part as a means of making institutional investors and market participants feel more comfortable getting involved, and reduce fear of contagion risk.
“Existing providers within the crypto-assets sector are unbundling their offerings into separate services – moving the exchange away from the settlement and custody of assets and ensuring that operators do not participate in their own orderbook and comingle client funds,” agrees Simon Forster, global co-head of digital assets at TP ICAP, speaking to Best Execution.
“When we announced to the market in 2021 our intention to launch a non-custodial crypto-asset exchange, Fusion Digital Assets, we did so because these principles are well-established across our traditional asset classes, and it was our concern that these basic principles were not part of the market structure within crypto-assets.”
A risky business
The volatility of the past year has brought the risks of digital assets to the fore – especially with the high-profile demise of players such as Three Arrows Capital and FTX. That doesn’t mean that investors don’t want to access the spot market, but the criteria for how to do so have perhaps become more restrictive. So now, according to Forster, the priority is to develop a “fit-for-purpose offering” that wholesale clients can utilise to access the physical market. “Over the last year there has been a flight to quality for institutions that have been trading or are looking to trade crypto-assets and associated products,” he confirms.
One example of this is TP ICAP’s new crypto-asset broking desk, first launched in January 2020, which matches buyers and sellers in crypto-asset derivatives. “We only execute onto regulated derivative exchanges in the main financial jurisdictions,” explains Forster.
“Over the last year they have seen a huge growth in volumes and open interest as crypto-asset trading firms moved existing flow onto these platforms, and more of our traditional clients came to market.
Optimistic outlook
“Whilst the asset class itself is in a perceived bear market, we believe that Bitcoin and Ether will have an increasingly meaningful role to play for our wholesale clients who move their economic activity onto blockchain networks. This blockchain-based economic activity will drive demand for access to the physical crypto-asset markets, and we expect to see activity being generated accordingly.
“Alongside access to the physical market, clients will continue to hedge positions with derivatives in the same way we see across traditional energy and commodities markets.”
TP ICAP already has several market makers and liquidity providers who have publicly committed to supporting the initial launch of the exchange, and will seed the market with liquidity. However, the firm is also working to make Fusion Digital Assets accessible to its global network of traditional clients through existing access points that simplify their entry to the market.
This includes through the original Fusion, its predominantly sell-side facing platform, as well as via Liquidnet, which offers connectivity to the buy-side.
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