Bloomberg News reports that a few of the biggest trading houses in the world and cryptocurrency companies are supporting small startups that will help ease the entry of Wall Street into the crypto trading firm. This it intends to achieve by tackling counterparty conflicts of interest and risks.
Hidden Road Partners, a well-known brokerage firm that focuses on foreign exchange and digital assets, has completed a $50 million funding round in the past month in which Citadel Securities was included, aside from the investment arms of FTX Trading Ltd.’s cryptocurrency exchanges. Coinbase Global Inc. is currently in discussion with hedge funds and the top 20 global banks. The move is being implemented to provide accessibility to hedge or trade their crypto risks, as an executive from the firm revealed.
The crypto meltdown that occurred recently has increased the importance of the management of counterparty risks. This follows the default by Three Arrows Capital and after Voyager Digital Ltd and Celsius Network Ltd were found to file for bankruptcy protection. This type of credit risk could also jeopardize the traditional funds’ interest in directly trading with cryptocurrency companies.
For the banking and other institutions that cannot directly hold digital assets, the company allows them to use dollars as collateral in a tri-party setup and receive profits and losses in dollars with a custodian. Clients can trade with the exchanges, as Virtu Financial Inc, Wintermute Trading Ltd, and Optiver BV are liquidity providers.
Bloomberg News reports that the startup will be entering a crowded space where several crypto brokers and platforms are vying for institutional traders. However, unlike many others, Hidden Road stated that it is a pure-play structure that would help eliminate the potential conflict of interest, like front running a customer’s trade for making a profit utilizing a proprietary trading unit.
Justin Chow, who is Hidden Road’s head of digital assets, revealed in an interview that Hidden Road is not into trading also added that the company does not make markets, is not involved in over-the-counter deals, and is not engaged in any venture capital. He also said that they are not into selling clients’ data, and it does not extend liquidity as the company’s principle of using their capital and a balance sheet.
Unlike any conventional bank, Hidden Road is not into carrying a huge balance sheet for lending to its clients. Instead, the company raises capital from the investors in the form of pension funds, and the investors get a return on the capital, which is generated by providing funding to the clients for trading activities. Hidden Road has been mitigating risks by using real-time systems, which helps set the risk limits and needs part of the collateral upfront.
