How Does Institutional Trading Work in Crypto?
Crypto Credit Risk | Fantom's Crypto Banking Plans | Coinbase Earnings Predictions
GM, this is your Daily Bolt briefing.
In today’s edition; we’re briefing you on the latest large scale events that could potentially impact the crypto ecosystem, including coverage on the First Republic Bank situation and potential contagion, as well as Coinbase’s earnings expectations. Additionally, we explore the latest in NFTFi, and Fantom’s intriguing plans to build their own banking service.
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If you’ve already checked out the research we have to offer on our platform, continue on to read our Note of The Day, which delves into the intricacies of crypto institutional trading, featuring insights from the CEO of a leading institutional trading venue.⬇️
Stay informed, stay ahead.
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1/ Blockbytes - Fantom Crypto Bank, First Republic Bank Fails, and More!
Preview: In this episode of Blockbytes, Clay, Nick Drakon, & DoubleSharp host Souvlaki & Mark Jeffrey to discuss Andre Cronje's potential Fantom Crypto Bank & its implications for Fantom. They also touch upon the collapse of First Republic Bank, other potential issues the FED might face, and much more. Click here to listen to the full episode (100 mins).
Read our Note (12 mins) and save 88 mins.
Here are some key takeaways:
Clay mentions Fantom's plan to establish a crypto-friendly bank, requiring a standard banking license, likely Australian-facing, and not retail-facing. He wonders what would be needed for Fantom to successfully run a bank, given the challenges faced by other companies like Caitlin Long’s, trying to obtain banking licenses in the crypto field.
Souvlaki believes that people might be getting ahead of themselves when discussing Fantom getting a banking license.
Souvlaki highlights four types of banking licenses in Europe:
Traditional license - license granted to a bank that allows them to offer in-person banking services through their branches, typically associated with regional banks.
FinTech license - license is specifically designed for online-based FinTech companies offering banking services.
Extended license - license is a partnership between a fintech company and an existing bank to offer financial services, similar to what Apple/Goldman Sachs partnership where Apple promotes users to use Applecard & Goldman Sachs has FDIC Insurance.
E-money license - a license that allows for the issuance and transfer of electronic money.
Souvlaki suggests that the most likely license that Fantom can acquire is an e-money license, which only allows for the transfer of money or currency exchanges, and it's unlikely they will be accepting deposits or giving out loans.
Clay discusses the failure of First Republic Bank and asks Nick Drakon about potential contagion and whether more banks will go under.
Nick Drakon explains that the bank had a high proportion of loans (total asset of 233 billion, out of which 173 billion is in loans), many of which were made at low rates and have lost value as interest rates have risen, causing the bank's assets to be written down.
Nick highlights the difficult decision the FDIC faces, as designating First Republic as systemically important could lead to accusations of bailing out the big banks. The FDIC is in a "damned if they do, damned if they don't" situation.
Cronos, the 10th biggest L1 in the space, has partnered with Amazon and made a public statement about the Cronos Accelerator program, which caused Cronos' price to rise by 13% in a day.
Justin notes that Amazon has been involved in crypto-related activities, such as partnering with Avalanche and Web3 gaming and running infrastructure for many projects, so it makes sense for them to partner with Cronos.
2/ Bell Curve - The Financialization of NFTs
Preview: In this episode of Bell Curve, which took place on May 5, 2023, Jason Yanowitz and Mike Ippolito are joined by Michael Anderson and Vance Spencer to talk about Coinbase earning predictions, Blur’s new NFT lending product, protocol stablecoins, ETH’s economics, and more. Click here to watch the full episode (70 mins).
Read our Note (8 mins) and save 62 mins.
Here are some key takeaways:
Mike states that Coinbase’s earnings have 2 buckets with different subgroups: transaction revenue and subscription and services revenue.
Although transaction revenue forms the primary revenue source for the company, the financial industry places significant emphasis on subscription and service revenue. This is largely due to the perception that transaction revenue is likely to trend downward to zero over time.
Transaction revenue can be further segmented into consumer and institutional categories. Consumer transaction revenue constitutes a substantial portion of the overall revenue due to comparatively higher fees charged to this segment.
Subscription and service revenue can be categorized into blockchain rewards, custodial fee revenue, and other subscriptions and services.
Mike shows the recent report of Coinbase’s Q1 2023 earnings:
Mike points out that Coinbase’s cbETH lost its market share since Ethereum’s Shapella upgrade.
Jason anticipates that there will be a lot more L2s, like Base, that will launch in the future.
Vance asserted that a deliberate effort is being made in the U.S. to prevent the banking crisis from being featured in prominent media outlets such as Bloomberg, New York Times, and Wall Street Journal.
Mike reported that Blur, the NFT marketplace that was introduced earlier this year (2023), has unveiled a new offering called Blend, which is a peer-to-peer NFT lending marketplace and is being touted as the next iteration of NFTFi.
He further explained that Blend features a unique mechanism whereby a lender can initiate a Dutch Auction, enabling another lender to acquire the NFT at a higher interest rate. In the event that no lenders express interest, the lender that triggered the auction can take possession of the collateral.
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The Scoop - Zodia Markets with CEO Usman Ahmad
In this episode of The Scoop which took place on April 28, 2023, Frank Chaparro is joined by Usman Ahmad (CEO of Zodia Markets) to discuss Zodia Markets, current regulatory challenges in crypto, and more! Read our notes below to learn more.
Background
Frank Chaparro - Host of The Scoop
Usman Ahmad - CEO of Zodia Markets
Zodia Markets - an institution-first digital asset marketplace
The Block - Leading information services brand in the digital asset space
Zodia Markets
Frank Chaparro mentions that Zodia Markets is backed by SC Ventures (Standard Chartered Bank's Innovation and Ventures unit) and BC Technology Group (Asia's leading digital asset company, parent of SFC-licensed Digital Asset Platform OSL).
Frank Chaparro asks Usman Ahmad to explain the business, noting that custody seems to be at the core, and inquiring about other aspects.
Usman Ahmad mentions that Zodia Markets has been set up by Standard Chartered Bank and have partnered with OSL to create a segregated business focused on trading digital assets, primarily cryptocurrencies.
Usman Ahmad highlights that Zodia Markets is non-custodial and has a sister company, Zodia Custody, which is focused on custody services and often causes confusion due to the similar name.
Usman Ahmad explains that they deliberately set up the businesses separately to anticipate the way the world may evolve and cater to institutional adoption. He expressed his belief that fully integrated crypto asset firms might not work for institutions looking to enter or scale digital assets, as they also trade other asset classes.
Usman Ahmad also mentions that Zodia Markets and Zodia Custody are legally distinct with separate shareholding and structures, maintaining arms-length agreements. Both companies have partnerships with other custodians, exchanges, and trading firms, aiming to bring the traditional finance ecosystem into the crypto space. Usman Ahmad explains that the market structure was designed to mitigate risk for clients.
Market Structure
Usman Ahmad left traditional finance in 2018 and helped OSL business get regulated by the Securities and Futures Commission in Hong Kong. SFC had requirements for client asset segregation, consumer protection, and insured assets for custody business, but didn't have a clear purview of a custodian.
Usman Ahmad wanted to avoid firms taking client assets onto their own balance sheets for inappropriate purposes and wanted to create maturity and trust in the ecosystem.
Frank Chaparro notes that dismantling incentives can help prevent issues within the industry.
Usman Ahmad explains that having access to clients' balances and trading activities can lead to unethical practices like front-running, which should be avoided. In traditional markets, front-running is taboo, while in crypto, it was previously the norm.
Jurisdictional Dynamics and Competitive Landscape
Frank Chaparro asks about the jurisdictional dynamics and the areas where clients are pushing the firm to operate.
Usman Ahmad explains that when Zodia Markets set up the business in late 2020, they considered where they had the right to win and where launching a business would be challenging. They felt that the U.S. was particularly well served with major participants being established and initially focused on Europe because they believed the UK and Europe were underserved in the institutional crypto ecosystem.
Usman Ahmad explains that Zodia Markets recognized an opportunity to establish itself as a UK-based company supervised by the PRA (Prudential Regulation Authority) and FCA (Financial Conduct Authority), with the support of Standard Chartered Bank. He also mentions that Zodia Markets sought regulatory approval from the Financial Conduct Authority.
Usman Ahmad also explains their interest in the Middle East, particularly Abu Dhabi, due to its relatively mature regulatory framework compared to the UK and Europe at the time.
Usman Ahmad mentions that Zodia Markets are currently operational in the UK and notes that they are in late-stage conversations with the Central Bank of Ireland to obtain passporting, which will enable them to operate across Europe once the MiCA regulation comes into effect. They are also seeking in-principle approval from ADGM (Abu Dhabi Global Market).
Usman Ahmad also says that Zodia Markets have received significant demand from institutions already operating in the crypto space, urging them to enter the US market. He explains that they are accelerating their strategy to access the US market in response to client demand.
Usman Ahmad also mentions that Zodia Markets are engaging with advisors, undergoing registration processes in certain states, and talking to regulators to establish themselves in the US.
Under Collateralized Lending and Credit Risk
Frank Chaparro mentions the competitive race to become a full-suite prime broker, noting that many firms have failed or gone bankrupt and highlights the demand for credit in a post-crypto credit meltdown world and inquires about filling in those gaps.
Usman Ahmad explains that credit risk was an afterthought in crypto and that the lack of pricing has led to many firms offering uncollateralized lending going out of business. He highlights that the demand for Zodia Market's services stems from the backing of a leading international bank, which is a differentiator.
Frank Chaparro asks how Zodia Markets leans on the credit risk specialists within the broader organization to assess risk.
Usman Ahmad clarifies that Zodia Markets partner with specialists and works within the constraints and governance model of Standard Chartered Bank, their parent company. He notes that they had to go through the board risk committee at Standard Chartered Bank to submit their regulatory business plan and work closely with the risk functions on site.
Usman Ahmad emphasizes that clients are reassured by the capability that Zodia Markets brings to bear because they have gone through the same sign-off process that any new product in a bank would have to go through.
Frank Chaparro believes that the age of under-collateralized lending in crypto is over. He points out that this is not great for institutional investment firms due to reduced capital efficiency. He also wonders how to extend credit in an under-collateralized fashion.
Usman Ahmad thinks that assessing creditworthiness is the first step to reintroducing under-collateralized lending. He emphasizes the importance of diversification in managing risks and ensuring businesses don't fail due to a single asset class decline.
Usman Ahmad also suggests that considering businesses with multiple lines or those that trade in multiple markets, such as equities and fixed income, can provide enough diversification to mitigate risks in under-collateralized lending.
Challenges in the Crypto Industry and Regulatory Clarity
Frank Chaparro asks about the challenges faced by organizations in the crypto industry.
Usman Ahmad believes that a firm won't necessarily fail because of one asset, indicating the resilience of the crypto industry.
Frank Chaparro points out that crypto-native lending firms and prime brokers face challenges in diversification compared to traditional financial institutions.
Usman Ahmad explains that firms lending to or against assets with a high correlation to their own business encounter challenges, including the lack of regulatory clarity.
Usman Ahmad says that institutional participation in the crypto ecosystem could increase with creditworthy counterparties, proper infrastructure, and a better understanding of the technology.
Frank Chaparro highlights the connection between regulatory clarity and the development of a robust crypto credit market.
Usman Ahmad emphasizes that institutional participation is unlikely without regulatory clarity and adequate infrastructure. He also observes the growing call for regulatory clarity, particularly in the US, and notes progress in Europe, the UK, and Asia. He warns that the US risks falling behind if it fails to provide clarity.
Business Scale and Client Engagement
Frank Chaparro asks Usman Ahmad about the scale of the business and the number of clients.
Usman Ahmad responds that they have onboarded 10 to 15 clients and have a pipeline of about 80 more. He describes the company as having around 35 employees and believes the crypto market cap will grow as they help unlock institutional access to crypto markets and digital assets.
Frank Chaparro mentions a $100,000 Bitcoin price target for 2024 set by analysts at Zodia Market's parent company, Standard Chartered Bank.
Usman Ahmad acknowledges that research analysts can be wrong, mentioning Geoff Kendrick, who has made both optimistic and accurate calls regarding the crypto market.
Frank Chaparro inquires about the pace of client engagement and conversation.
Usman Ahmad admits his calendar is busy with the right future-looking conversations. He compares the pace of these conversations in crypto to those in traditional finance, stating they are equally slow but future-oriented.
Services Offered and Crypto Credit Risk Experts
Frank Chaparro asks what the number one service firms want from Usman Ahmad's company.
Usman Ahmad believes firms want to trade crypto without changing their operational processes. He notes that the T+0 settlement is a scary prospect for firms that are used to a T+2 cycle and funding their businesses on an overnight basis. Firms want credit or overnight funding without pre-funding, and access to payment rails that allow for instant transactions. They want to deliver fees along payment rails that allow for instant movement.
Usman Ahmad mentions recent challenges in banking that exacerbate the problem and notes that firms are looking for a company that can offer the future without so much uncertainty.
Frank Chaparro inquires about how much Usman's company can do in terms of pre-funding and meeting client needs.
Usman Ahmad explains that they have a risk team to assess credit risk and can extend credit lines to appropriate counterparties.
They also offer access to the crypto ecosystem through a network of partners, providing liquidity and enabling trading on their exchange or OTC (Over the Counter).
Crypto Credit Risk and Audits
Frank Chaparro recalls a conversation with a CEO from a major crypto firm four years ago, who said that the unicorn in the space was a crypto credit risk expert.
Usman Ahmad disagrees that one needs to be a crypto credit risk expert and asserts that understanding credit risk is sufficient. He highlights the importance of evaluating counterparty creditworthiness, balance sheets, exposure, and business correlation.
Frank Chaparro agrees that getting a good sense of balance sheets can be a challenge in the crypto ecosystem, and attributes this to competing VC-backed crypto brokers with growth incentives who may overlook certain deficiencies.
Usman Ahmad stresses the need for maturity in the ecosystem and understanding the requirements for operating a credible business. He emphasizes the value of audits as a means of independent verification and reassurance.
Frank Chaparro jokes that nobody likes an audit. Usman Ahmad acknowledges that audits can be challenging but notes that they are necessary for establishing trust in a firm's operations, particularly in credit-related businesses. He underscores the importance of doing the basics to run a safe and sound business, which applies to all asset classes in financial markets.
Anticipation for the Market and Asia's Role
Frank Chaparro asks Usman Ahmad about his anticipation for the next six months in the market.
Usman Ahmad believes the market will come out of the doldrums and expects regulatory clarity to provide more certainty. He hopes that US regulators like the SEC (Securities and Exchange Commission) or CFTC (Commodity Futures Trading Commission) will make a determination about the industry's direction.
Usman Ahmad thinks if the U.S. doesn't get on board, the institutional adoption flow will go elsewhere, as businesses are already relocating away from the US. He believes it's shortsighted for businesses to move away from the US, the world's biggest market.
Usman Ahmad expects institutional adoption to flow, which is the thesis of his entire business. He believes regulatory clarity will help, with MiCA coming in for a consultation in the UK, leading to a regulatory framework that can be adopted and applied.
Usman Ahmad also mentions a resurgence in Asia, particularly in Hong Kong, post-COVID.
Frank Chaparro asks if Usman Ahmad has been to Asia recently. Usman Ahmad says he was in Singapore in November but hasn't been to Hong Kong. He believes Asia will be an engine for growth in the crypto ecosystem as it recovers from political instability and COVID. He thinks the regulatory clarity and frameworks provide more certainty for businesses in the crypto space, leading to more competition, which is beneficial for the industry.
Connecting with Usman Ahmad
Usman Ahmad recommends visiting Zodia markets' website, following him on LinkedIn, and reading their thought pieces.
He mentions they are working to build their profile and collaborate with Standard Chartered Bank to communicate their proposition.
Important Links
aiPX is the official sponsor of the Daily Bolt by Revelo Intel
In a post-FTX world, securely trading with leverage and earning real yield in a decentralized manner has never been more important.
aiPX offers cutting-edge risk management for liquidity providers, leverage trading, and a suite of products between perpetuals, binary options, and synthetics.
Earn passive yield and trade with leverage straight from your wallet.
Take the step, join the presale.
Great post and interview. I like what zodia markets is doing. Legitimizing the crypto market is a sure way to onboard institutions.
Is there anything else you could tell us about the aiPX presale? Couldn't find any info about them online but saw that they were your official sponsor.