Investment

Prime brokers move into digital assets, attracting family office investors

The $270 billion digital assets market has taken a big step towards the investment mainstream following prime broking initiatives by three rival providers.

As the news broke, a survey of 800 institutions, including family offices, was published by Fidelity and Greenwich Associates which said 36% of respondents invested in digital assets, with Europe’s 45% leading the way. Around 91% of them say they could be using them in five years time.

Coinbase, Genesis Trading and BitGo have each begun rolling out prime broking services which include custody, settlement, lending and best execution.  

This means family offices, hedge funds and other institutions will find it easier to invest in digital assets in scale and keep them in safe custody. It has become easier to access credit and, to an extent, take short positions.  The evolution of this infrastructure is essential to the transition of a virtual cottage industry into a fully-fledged securities market. 

US-based Coinbase, originally a retail cryptocurrency operation has enhanced its service by acquiring Tagomi, an order-routing platform capable of best execution.

Genesis Trading, which has supplied $6bn in crypto lending to traders since March last year has gone on to buy crypto custodian Vo1t. 

BitGo, which started life as a wallet technology provider, has confirmed the launch of BitGo Prime after buying tax and reporting platform Lumina.

Mainstream investment banks, such as JP Morgan, Nomura and BNP Paribas are yet to show their hand on the digital asset prime broking front. 

But David Nage, a former family office investor and principal at Arca, the digital asset strategist, said the latest moves into prime broking were important. He said mainstream banks tend not to show interest in a new sector at the outset, preferring to buy sector leaders when growth has been achieved.

Bitcoin is a market leader in digital investment ahead of other assets like Ethereum and stablecoin, which can be pegged to fiat currency. Prime broking developments are leading to a greater supply of credit plus hedge fund activity.  

According to Fidelity, investors are interested in digital assets as an uncorrelated asset class. Investors also like their freedom from government issuance. Consultant Cambridge Associates gave its cautious support to the sector last year. 

Investors have expressed concern over market manipulation, volatility and a lack of fundamental analysis. Tom Jessop, president of Fidelity Digital Assets said: “Investor concerns are largely focused on issues that will resolve themselves as the market infrastructure develops.”

David Nage said he had come across several deals in security tokens in sectors like real estate. Basketball star Spencer Dinwiddie has been trying to tokenise the first year of his three year contract with the New Jersey Nets.  But Nage said security tokens would benefit from greater momentum.

BitGo CEO Mike Belshe said:  “Sooner or later as this thing does move mainstream, the incumbents are going to be looking for how do they build these offerings.”

Oliver von Landsberg-Sadie CEO of BCB Group said Coinbase’s Tagomi deal showed the market is already maturing.

“Coinbase has always had ambitions to broaden into OTC; they have an OTC desk, although it’s never been the most liquid of OTC desks. But they definitely have deep pockets for the kind of lending required for non-standard positions,” he said.

Michael Moro, CEO, Genesis Trading said:  “The all-in-one platform has been missing in crypto space for three years and we believe that as more institutions enter crypto they will expect that service,” said Moro. 

“Although we have started from different places, we are trying to be there for when the big accounts come calling.”

Not everyone is so bullish. Max Boonen, CEO of B2C2, a liquidity provider on Tagomi’s platform, is bullish on the future of crypto, but warned against firms crowding into the prime broking sector.

He pointed to firms that had been created and funded with the objective of becoming the first fully-formed prime broker on the scene. 

“I think personally all of those attempts are doomed to fail,” he said. “The reason is simple: you can raise a ton of money, but it’s not going to get you a client base – and that’s a problem.”

Blocktower Capital founder Ari Paul, warned: “Does crypto have a prime broker in a binary sense? No. A lot of players from different angles are attacking the prime feature set, but when most of them say they are prime brokers it is a bit aspirational.”

Elsewhere, central banks are assessing the sector, with an eye on tougher regulation. But several governments have expressed interest in producing digital versions of their own currencies

Ian Allison, a reporter with Coindesk, contributed to this article.

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