Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
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‘Bad things could happen’: Turning to tech to tame the crypto jungle
Reuters | Tom Wilson | Sep 11, 2019
LONDON (Reuters) - “Hi guys, could you please show me a firm bid for 100 bitcoin?” a seller texts on Skype.
Joel Fruhman, right, and Dan Fruhman, directors of BCB Group pose for a photograph in London, Britain August 29 2019. REUTERS/Simon Dawson
“One sec. $10270.”
Two minutes later: “Sorry guys, that was an old order from Friday when skype wasn’t working.”
“I really think we should get off skype. Bad things could happen. Someone is going to make an expensive mistake.”
See: New money-laundering rules change everything for cryptocurrency exchanges
A messaging exchange over a potential $1 million deal, between a European asset manager looking to sell bitcoin and broker Joel Fruhman, illustrates the casual and often chaotic nature of cryptocurrency dealmaking.
Trades involving hundreds of thousands, or millions, of dollars are routinely struck via brief chats on apps like Skype, WhatsApp, WeChat or Zoom, often with scant certainty over the identities of participants or the legal basis of agreements.
“We’d end up in a Zoom call with about five ‘introducers’ - we didn’t really know who any of them were,” said Fruhman, a physicist by training who started a cryptocurrency brokerage business with his brother Dan in their British hometown of Manchester in 2018.
“And who were we? What was our credibility?”
Over-the-counter (OTC) trading - buying and selling through a broker - is now beginning to change, however.
It is moving toward electronic automation as the cryptocurrency sector matures from the province of online enthusiasts to emerging financial assets drawing increasing mainstream interest, Reuters interviews with more than a dozen industry players show.
This is a fundamental shift, as messaging apps have for years been the predominant platforms.
It is a key front in attempts by cryptocurrency enthusiasts with roots in the traditional finance industry to drag into the mainstream a singular, largely unregulated sector born on the web a decade ago as a symbol of rebellion against the establishment and offering users near-anonymity.
OTC trading is favored by big investors like hedge funds because cryptocurrency exchanges often suffer from thin liquidity, and large buy and sell orders can move the market.
See: A Global Review Of The Regulatory Considerations Relating To Crypto-Asset Trading Platforms
But the opaqueness of the messaging process and its impracticality for use on a large scale, plus the glitches that could cause the “expensive mistake” warned of by Fruhman, have left it fraught with risk.
Now, as spreads - the differences between bid and ask prices for immediate orders - tighten as liquidity in crypto markets grows, OTC brokers and market makers are seeking to move away from unsophisticated chats and offer quotes electronically, with automated execution and settlement.
“Things have shifted quite rapidly toward electronic trading,” said George Zarya, CEO of London-based cryptocurrency exchange BeQuant, which also runs an OTC desk and is planning to switch toward automation.
“Anything that is liquid – bitcoin or ethereum – these markets are going to go electronic. That’s a natural path that traditional markets have gone through.”
The changes are likely to appeal to larger investors using algorithms and high-frequency trading for whom split-second timings are important, according to the interviews with cryptocurrency OTC brokers, market makers and investors.
Alameda Research, a crypto trader based in California and Hong Kong, launched an almost entirely automated OTC desk around six months ago that is already seeing flows of $20 million-$30 million a day, said Ryan Salame, its Asia-Pacific head of OTC.
For Salame, the future of OTC trading is electronic, with prices for all but the smallest coins to be quoted electronically.
“This is just the next step how you stay more competitive. Each desk is trying to be more competitive and making better systems,” he said. “It’s just a by-product of spreads coming in so much that I can’t update in the chat fast enough to give people the pricing they’re expecting.”
‘CAN YOU SELL A FEW MILL?’
The Fruhman brothers, Joel aged 29 and Dan 28, built a contact book packed with bitcoin miners they met on internet forums and apps as they grew interested in the emerging technology.
See: Another Canadian Crypto Exchange Under Fire
Miners use computers to solve complex mathematical puzzles, competing against others and earning rewards in the form of new digital coins. As recently as a few years ago, individual crypto enthusiasts could mine bitcoin from their bedrooms.
But many had a problem, the Fruhmans found: They were producing bitcoin faster than they could convert them to the cash they needed to clear the hefty electricity bills run up by their high-powered computing gear working overtime.
“We saw something very clear: A bunch of guys with a lot of bitcoin valued in USD, who had no idea how to turn that into money,” said Joel. “It started with one request, which was just one of these guys, our mate, who was like: ‘Can you sell a few mill?’”
Late last year, in an attempt to tap bigger investors and offer more sophisticated back-office services, the brothers swapped their contact book for a stake in a startup run by ex-financiers well-versed in the infrastructure of the financial system, from escrow accounts to settlement systems.
The startup, BCB Group, then based in London’s financial district, offered something the Fruhmans lacked: regular access to clients from mainstream finance willing and able to buy the regular supply of digital coin offered by their mining contacts.
“It’s not the stoned 22-year-old that we were dealing with a year and a half ago,” said Joel. “And it’s not the equity traders, the Goldman Sachs. They’re kind of in between - it’s growing from one into the other.”
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