EDX crypto exchange is the latest sign that the sector is growing up

Despite a slowdown in crypto markets, several large institutional investors are seeking to invest in crypto.

One factor holding them back is a lack of infrastructure for large institutions compared to what is found in the traditional, regulated capital markets.

That is changing, as the technology infrastructure for crypto begins to mature in areas ranging from security to data. One area that is being expanded is crypto trading as a service, with APIs and other products that developers and companies can use to set up crypto trading for their customers.

The latest sign of this maturation is EDX, a new digital asset exchange being developed by Wall Street players such as Citadel Securities, Virtu Financial, Fidelity Digital Assets and Charles Schwab, as well as venture capital firms Sequoia Capital and Paradigm.

The digital exchange, led by former Citadel Securities CEO Jamil Nazarali, is roughly modeled and built on the trading technology of the Members Exchange, or MEMX, another exchange being developed by similar companies as an alternative to major exchanges such as the NYSE and Nasdaq. .

EDX’s custody and settlement technology will be provided by crypto custody and infrastructure company Paxos, the companies planned to announce Wednesday.

Paxos, which is a custodian regulated by the State of New York, maintains client accounts in fully segregated accounts and has registered large consumer-facing clients to enable crypto trading. Their clients include PayPal, broker dealers such as Interactive Brokers and others such as Nubank and Mastercard. Paxos has a conditional bank trust charter from the OCC and says it expects the chartered entity, Paxos National Trust, to open later this quarter.

Until now, big banks have not moved heavily into crypto due to accounting, risk, security and regulatory concerns, as well as demands from the Federal Reserve and a desire for more mature technology, said Walter Hessert, chief strategy officer at Paxos. “We still haven’t seen any of the major bank holding companies in the US bring one of these offerings to market,” he added.

EDX, with its leadership and support from Wall Street firms, could attract big banks to digital assets, he said. EDX “brings traditional market structure and also traditional market participants to this liquidity offering through the exchange that is really going to be built to support and attract these types of bank holding companies and brokerages,” Hessert said. For example, EDX plans to offer delivery settlement versus payment settlement, a settlement method used in traditional securities trading.

EDX also differs from some other crypto providers in being a market maker, exchange and manager all in one, which can be a conflict of interest and is not usually done in traditional markets, Hessert said.

More large liquidity pools like EDX will also increase the transparency of the crypto market, Hessert said. Currently, crypto markets can be opaque, with wide spreads and high volatility.

Competition to provide crypto trading, custody, security and related technology for large institutions is intense. The resulting wave of consolidation isn’t without its hiccups: Wyre canceled its deal to be acquired by Bolt for $1.5 billion last month. But more deals may come soon in this sector, as many providers offer overlapping services, analysts say.

Coinbase offers crypto trading APIs, escrow, payment API and related services, seeking to attract both large and small customers. Coinbase has three related APIs – a general one for trading, deposits, withdrawals and tax reporting; another for streaming market data; and a specialized FIX API for sophisticated traders. Coinbase, which recently announced a deal with BlackRock, has an advantage in routing orders to its own exchange or, for large customers using the Prime API, to other liquidity providers.

A number of other API providers such as Prime Trust, MoonPay, Wyre and Transak have emerged to offer quick and easy connections to crypto trading and other services, especially for fintech and crypto developers building apps. Custody providers such as Anchorage and Fireblocks also offer crypto trading. And others are jumping in: Stripe has announced products for merchants to pay out in crypto or convert fiat to crypto.

“The convergence we’re seeing in the industry is that people are moving up and down the value chain, because competition has increased,” said Sara Xi, chief product officer at Prime Trust. “So the more you cover in the value chain, the more sources of income you have.”

DriveWealth, which offers stock trading as a service to clients such as Revolut and Cash App, has expanded into crypto, acquiring a smaller firm, Crypto-Systems. The company can send crypto trades to multiple exchanges and liquidity sources to get the best prices, said Duncan Wells, market strategist at DriveWealth.

Paxos offers custody, trading and wallets for PayPal’s crypto offerings. PayPal announced in July that customers could send and receive crypto, not just buy and sell as before. While consumer interest in crypto may be down with the overall market, this latest move has quietly opened up a number of future new uses for PayPal’s large customer and merchant base.

“The ramps now created through trusted products are an order of magnitude more than where they were before PayPal launched these transfers,” Hessert said.