The Future of Prime Brokerage

Even with more and more new crypto prime brokerage options on the market, traditional prime services providers may not be going anywhere anytime soon. 

Compared to traditional prime brokerages, crypto providers’ exchanges operate as separate units with their own order books and prices. That means investors need to onboard at various different platforms and fund their accounts on each of them, which some in the traditional world might see as costly and inefficient.

“The way that the crypto market works is different from a traditional space,” said Michael Shaulov, CEO and co-founder of Fireblocks, who spoke at an online event on Thursday hosted by CryptoCompare and BlockFills. “We rely on DTCC or on other market functions that will provide centralized clearing by the finish. The way the [crypto] market operates (and Binance.US is a great example), if Binance needs to operate one leg which is an institutional flow but on the other leg it has retail users that can withdraw those funds at any point in time, the market structure needs to be different.”

While Shaulov said the market is pivoting and prime services providers are trying to provide the services that allow institutional firms to take advantage of what the digital asset market has to offer, not everyone will, according to Lory Kehoe, director of digital assets and blockchain for BNY Mellon (which uses Fireblocks technology for its digital assets custody service).

“Traditional prime brokerage services aren’t going to go away,” Kehoe said during the online event. “There’s still a definite requirement for them. It’s also going to take some time for regulatory clarity to come through. I expect what we’ll see is some will pivot successfully and provide services in the crypto space as well as in the traditional space, and some won’t make that pivot.”

Fragmented liquidity and trading

One reason digital assets trading is so retail dominated is because of the fragmentation of liquidity and trading across geographies and exchanges, according to another member of the online event, Neil Van Huis, partner and director of trading at BlockFills, an institutional digital asset liquidity provider.

Prime brokerage in digital assets might look different from prime brokerage in the traditional world in that the crypto community has no problem letting trades settle at the end of the day. “That’s just something that seems normal to us,” he said.

Trading on an exchange, by contrast, changes the participants with whom you’re interacting. 

“If you want to go and do an institutionally focused trade on a predominantly retail-focused exchange, that is going to be a difficult thing to do, unless you can have a prime services arm that essentially provides credit to everyone that’s been involved in this type of transaction,” Van Huis said. “That’s typically very costly. It’s not a capital efficient thing to do.”

BlockFills is trying to disrupt the traditional futures clearing model by creating an ecosystem that focuses on institutional participation so capital efficiency is easier to handle, Van Huis said. It’s building a set of technology, products or services that allow institutional participants to do “about as much as they’d like to do in the space in a seamless and compliant manner.”

“If you can use blockchain technology from companies like Fireblocks, and you can work with custodians and banks like BNY Mellon, to accomplish some of the things that you’re doing with other institutionally minded folks that are providing liquidity in your ecosystem, you can actually achieve a result that we’re talking about,” Van Huis said.

An institutional force

The digital asset industry was largely retail led until about 2019, and there’s a strong institutional force coming through now.

Binance.US has more retail flow than any other exchange because it has the lowest price point in the US, according to Rena Shah, head of operations and business development at Binance.US, who was also on the event panel. It is, for many, their gateway into digital assets.

“We are getting our first entrance of people doing the first couple hundred, couple thousand dollars, then slowly aggregating larger positions, they want to become high frequency traders — it’s similar to a Wall Street bets situation where people are pulling their own knowledge so that they can move the market together,” Shah said.

On the flip side, she said an increasing number of entities and corporate structures have been adding digital assets to their balance sheets, and while Binance.US has take orders coming in from retail investors, institutions are on its maker side.

“It’s a really interesting ecosystem,” she said. “For once they actually get to trade against each other — it’s not an institution trading against an institution. They want these very attractive retail orders to trade against because they know that there are real people behind, moving the market.”

“[Institutions] generally prefer to come to an exchange, more so than a traditional prime brokerage because of the perspective we provide,” Shah said. “We are not a team that’s kind of touches digital assets, we’re only in digital assets. This is all that we know, this is all that we advise on and I think they kind of appreciate the unique perspective as opposed to having just a fraction.”