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(AP Photo / Mark Lennihan)
While the entry of institutional actors in the cryptographic space continues to attract, the market of a strange form of exchange known as "over the counter" is becoming an increasingly critical focus for the cryptocurrency ecosystem.
While most people trying to buy or sell cryptocurrency can do so through standard exchanges, large institutional investors and people with high net worth who carry out transactions in large amounts of bitcoins must look to the relatively unexplored world of OTC markets to perform these exchanges .
Since cryptocurrency exchanges typically lack the technological infrastructure and liquidity required to execute large block orders, large buyers and sellers are forced to find themselves reciprocally venturing into Skype chatrooms hosted by commercial companies such as Cumberland, private messaging platforms like Telegram and even public forums like LinkedIn.
"Big business has to go through OTC, many exchanges limit the size of the order, so you have to break orders, and that's just fatal," said Monica Summerville, director of fintech research at Tabb Group, a research company market based in the United Kingdom.
The breakdown of a large sales order, such as 1,000 bitcoins, could send a negative signal to the market and trigger what is known as slippage – so the price of an execution negotiation is & nbsp; different from the expected price.
The attraction of OTC for traders, miners and the like is that it provides a much needed field of experimentation from encryption to fiat, made necessary by the fact that most of the largest cryptographic exchanges do not deal with fiat currency.
"We prefer to hide in fiat when we want to liquidate." Others enter (stablecoins), but there is plenty of shadow out there, so we prefer not to diversify, "said a trader, adding that simply transferring resources to a fiat-compatible exchange it is not always a ready solution:
Many exchanges use banking services in different countries and geographical areas that are not necessarily respected. Just because you can get into an exchange does not necessarily mean you can get it out. "
How wide?
These markets have become significantly more popular and competitive in the last 12 months, according to the participants, as more sophisticated investors and traders enter the space. Many of these players have started trading through brokers like Octagon Strategy, Genesis Trading, Circle, although the exact size and scope of this market remain difficult to quantify.
A relationship at the beginning of the year & nbsp; produced by Tabb Group has estimated daily volumes of OTC bitcoins to $ 12 billion globally. Summerville calculates that this figure is two to three times larger than the daily average exchanged through standard encryption exchanges globally, although this is a difficult comparison to quantify because the volume data reported by the exchanges may be of doubtful veracity:
No one is checking volumes that are reported and it is suspected that exchanges are doing various things to increase volumes that would not be legal for a regular regulated exchange. "
However, estimates of the actual size of the OTC bitcoin market vary widely. Lucas Nuzzi, director of technology at Digital Asset Research, sets total daily volume at around $ 250 million.
"This is very different from the other figures we see out there," he said. "Our estimate is based on things we can see and people we interact with who actively participate in those markets".
Institutional obstacle?
While the influx of new institutional funds in cryptography has been the subject of endless discussions and speculation over the past 12 months, the lack of exchange infrastructure has prompted many of the brave players to venture into the OTC realms.
"Structurally, for many institutional investors, OTC is really the only way they can trade the most liquid assets," said Nuzzi.
However, a general darkness and lack of sophistication in OTC markets has not created an environment in which institutions can be fully comfortable to participate.
In some ways, paradoxically, OTC encrypted trading requires a high degree of trust when the fiat is the ultimate goal.
"Currently, some parts of the cryptocurrency industry are organizing six-party exchanges on Skype and Telegram – much like how old-school Wall Street brokers and traders would call customers to bring buyers and sellers together," he explained. Frank Wagner, founding partner of INVAO – an investment vehicle enabled for artificial intelligence for cryptographic resources.
Wagner stressed:
Clearly, this can not be the safest and most effective way to carry out these exchanges and it could be one reason why many institutional investors are dissuaded from getting involved ".
In particular, OTC encrypted trading carries with it several unique forms of counterparty risk. One aspect is that, due to anti-money laundering regulations, many financial institutions are still opposed to the idea of processing large transfers directly related to cryptocurrency transactions. This means that even if an agreement is agreed by both parties, there is no guarantee that the fiat transfer can actually be performed.
An encryption for fiat exchange is also asymmetric in the sense that the transfer of coins takes place much faster (sometimes by many hours) than the transfer of the wire.
"When you exchange with an OTC broker, you must hand over the currency to the broker after the exchange, and until the broker gives you the BTC / ETH or Fiat, you risk failing, for example, before delivering your tokens or funds, "said Daniel Peled, co-founder of the Orbs hybrid blockchain project and an experienced OTC trader, adding:
Basically there is the counterparty risk that the other party may not be solvent as it does not occur in real time, so you need to trust them to bind the money. "
Gene Grant, CEO of VRBEX – an exchange of cryptographic and security tokens, explained that with the increase in transaction size, the process becomes more complex and a high level of counterparty risk is added due to high stakes .
"The big transaction market is quite small, and the players are deeply wary," he said. & Nbsp; & nbsp;
Still others argue that more robust regulation, custodial solutions and surveillance tools are needed to give traditional investors the security they need to gain more aggressively in OTC crypts.
"The OTC is similarly regulated to other traditional commercial ecosystems, but the industry is still lacking monitoring tools for application," said Peled, adding:
Therefore, the fear that some parties share knowledge and front running is a real concern for traders. "
Solutions at the horizon
But despite the crypto declining markets that have lived since the beginning of the year, numerous onramps have been built with the goal of bringing a more sophisticated infrastructure to OTC markets.
A sure sign of maturity is last week ad that Fidelity, the fifth largest asset manager in the world, is entering the world of storage and encryption trading – from which it comes from OTC markets – for institutional investors.
In fact, the creation of software systems for encryption able to replicate the systems of liquidation, compensation and risk management to which traditional investors are accustomed is becoming a big business.
"Even if the market has disappointed many people, the infrastructure has not been sacrificed and there are still many things to build," explained Nuzzi. "There are dozens of software vendors who are addressing this need from OTC traders."
For example, OTCXN is creating a multi-custodian network that seeks to address the lack of a clearing and settlement mechanism that can link liquidity providers and trades with minimal counterparty and settlement risk.
"What we have created is a Layer 2 network at the institutional level, like Lightning Network, except for the fact that it operates on all cryptographic resources and on the scale and institutional capacity", said Rosario Ingargiola, OTCXN CEO.
"It is simply not possible to scale the cryptographic markets to institutional levels without removing the public accounting transactions from the critical trading path in real time", he continued, explaining that its platform will facilitate OTC exchanges between counterparties to be settled and less liquidated. of a second.
OTCXN recently announced partnership with Kingdom Trust and Prime Trust, both of which are registered as qualified depositaries with the Securities and Exchange Commission, for custody of cryptographic assets traded on its platform.
Another solution that is making progress in this kingdom is Caspian, which recently lifted up nearly $ 20 million in a first coin offering with the goal of providing sophisticated traders and investors with better tools, such as a single user interface that connects to major exchanges. In early October, Caspian collaborated with B2C2 – the crypto-market maker – to better meet the liquidity needs of large OTC operators. & nbsp;
But while there may be a Cambrian explosion of new platforms dedicated to helping institutional traders to manage the risk that comes on the scene, Nuzzi di DAR argues that the market for the duplication of legacy trading tools will probably end up being niche:
Many of them will fail only because there is this infrastructure under development that already exists in traditional financial markets. "
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While the entry of institutional actors in the cryptographic space continues to attract, the market of a strange form of exchange known as "over the counter" is becoming an increasingly critical focus for the cryptocurrency ecosystem.
While most people trying to buy or sell cryptocurrency can do so through standard exchanges, large institutional investors and people with high net worth who carry out transactions in large amounts of bitcoins must look to the relatively unexplored world of OTC markets to perform these exchanges .
Since cryptocurrency exchanges typically lack the technological infrastructure and liquidity required to execute large block orders, large buyers and sellers are forced to find themselves reciprocally venturing into Skype chatrooms hosted by commercial companies such as Cumberland, private messaging platforms like Telegram and even public forums like LinkedIn.
"Big business has to go through OTC, many exchanges limit the size of the order, so you have to break orders, and that's just fatal," said Monica Summerville, director of fintech research at Tabb Group, a research company market based in the United Kingdom.
The breakdown of a large sales order, for example of 1,000 bitcoins, could send a negative signal to the market and trigger what is known as slippage – so the price of a transaction at the execution is different from the expected price.
The attraction of OTC for traders, miners and the like is that it provides a much needed field of experimentation from encryption to fiat, made necessary by the fact that most of the largest cryptographic exchanges do not deal with fiat currency.
"We prefer to hide in fiat when we want to liquidate." Others enter (stablecoins), but there is plenty of shadow out there, so we prefer not to diversify, "said a trader, adding that the simple transfer of assets to an exchange compatible with the fiat is not always a ready solution:
Many exchanges use banking services in different countries and geographical areas that are not necessarily respected. Just because you can get into an exchange does not necessarily mean you can get it out. "
How wide?
These markets have become significantly more popular and competitive in the last 12 months, according to the participants, as more sophisticated investors and traders enter the space. Many of these players have started trading through brokers like Octagon Strategy, Genesis Trading, Circle, although the exact size and scope of this market remain difficult to quantify.
A report at the beginning of this year produced by the Tabb group estimated daily bitcoin OTC volumes at $ 12 billion globally. Summerville calculates that this figure is two to three times larger than the daily average exchanged through standard encryption exchanges globally, although this is a difficult comparison to quantify because the volume data reported by the exchanges may be of doubtful veracity:
No one is checking the volumes being reported, and there are suspicions that exchanges are doing various things to increase their volumes that would not be legal for a regular regulated exchange. "
However, estimates of the actual size of the OTC bitcoin market vary widely. Lucas Nuzzi, director of technology at Digital Asset Research, sets total daily volume at around $ 250 million.
"This is very different from the other figures we see out there," he said. "Our estimate is based on things we can see and people we interact with who actively participate in those markets".
Institutional obstacle?
While the influx of new institutional funds into cryptography has been the subject of endless discussions and speculation over the past 12 months, the lack of exchange infrastructure has prompted many of the brave players to venture into the realms of the OTC.
"Structurally, for many institutional investors, OTC is really the only way they can trade the most liquid assets," said Nuzzi.
However, a general darkness and lack of sophistication in OTC markets has not created an environment in which institutions can be fully comfortable to participate.
In some ways, paradoxically, OTC encrypted trading requires a high degree of trust when the fiat is the ultimate goal.
"Currently, some parts of the cryptocurrency industry are organizing six-party exchanges on Skype and Telegram – much like how old-school Wall Street brokers and traders would call customers to bring buyers and sellers together," he explained. Frank Wagner, founding partner of INVAO – an investment vehicle enabled for artificial intelligence for cryptographic resources.
Wagner stressed:
Clearly, this can not be the safest and most effective way to carry out these exchanges and it could be one reason why many institutional investors are dissuaded from getting involved ".
In particular, OTC encrypted trading carries with it several unique forms of counterparty risk. One aspect is that, due to anti-money laundering regulations, many financial institutions are still opposed to the idea of processing large transfers directly related to cryptocurrency transactions. This means that even if an agreement is agreed by both parties, there is no guarantee that the fiat transfer can actually be performed.
An encryption for fiat exchange is also asymmetric in the sense that the transfer of coins takes place much faster (sometimes by many hours) than the transfer of the wire.
"When you exchange with an OTC broker, you must hand over the currency to the broker after the exchange.Then the broker does not deliver the BTC / ETH or Fiat, you risk, for example, failing to deliver your tokens or funds, "said Daniel Peled, co-founder of the Orbs hybrid blockchain project and an experienced OTC trader, adding:
Basically there is the counterparty risk that the other party may not be solvent as it does not occur in real time, so you need to trust them to bind the money. "
Gene Grant, CEO of VRBEX – an exchange of cryptographic and security tokens, explained that with the increase in transaction size, the process becomes more complex and a high level of counterparty risk is added due to high stakes .
"The large transaction market is quite small and players are deeply suspicious," he said.
Still others argue that more robust regulation, custodial solutions and surveillance tools are needed to give traditional investors the security they need to gain more aggressively in OTC crypts.
"The OTC is similarly regulated to other traditional commercial ecosystems, but the monitoring tools for the application are still lacking in the sector," said Peled, adding:
Therefore, the fear that some parties share knowledge and front running is a real concern for traders ".
Solutions at the horizon
But despite the crypto declining markets that have lived since the beginning of the year, numerous onramps have been built with the goal of bringing a more sophisticated infrastructure to OTC markets.
A sure sign of maturity is last week ad that Fidelity, the fifth largest asset manager in the world, is entering the world of storage and encryption trading – from which it comes from OTC markets – for institutional investors.
In fact, the creation of software systems for encryption able to replicate the systems of liquidation, compensation and risk management to which traditional investors are accustomed is becoming a big business.
"Even if the market has disappointed many people, the infrastructure has not been sacrificed and there are still many things to build," explained Nuzzi. "There are dozens of software vendors who are addressing this need from OTC traders."
For example, OTCXN is creating a multi-custodian network that seeks to address the lack of a clearing and settlement mechanism that can link liquidity providers and trades with minimal counterparty and settlement risk.
"What we have created is a Layer 2 network at the institutional level, like Lightning Network, except for the fact that it operates on all cryptographic resources and on the scale and institutional capacity", said Rosario Ingargiola, OTCXN CEO.
"It is simply not possible to scale the cryptographic markets to institutional levels without removing the public accounting transactions from the critical trading path in real time", he continued, explaining that its platform will facilitate OTC exchanges between counterparties to be settled and less liquidated. of a second.
OTCXN has recently announced partnerships with Kingdom Trust and Prime Trust, both of which are registered as qualified depositaries with the Securities and Exchange Commission, for custody of the cryptographic assets traded on its platform.
Another solution that is making progress in this field is Caspian, which has recently raised nearly $ 20 million in a first coin offering with the goal of providing sophisticated traders and investors with better tools, such as a better value for money. single user interface that connects to the main exchanges. In early October, Caspian worked with the B2C2, the crypto-market maker, to better meet the liquidity needs of large OTC traders.
But while there may be a Cambrian explosion of new platforms dedicated to helping institutional traders to manage the risk that comes on the scene, Nuzzi di DAR argues that the market for the duplication of legacy trading tools will probably end up in a niche:
Many of them will fail only because there is this developed infrastructure that already exists in traditional financial markets ".
