Animoca Brands, the web3 investment firm, has ramped up efforts to pitch an in-house market making service to startups in its vast portfolio.

The Hong Kong-based company has in recent months presented those market making capabilities to some of the more than 400 projects it has backed, in an apparent push to get more projects using the service, according to four people familiar with the matter. 

That puts Animoca — to date predominantly focused on investing in, building and advising web3 projects — in competition with specialist market makers, such as GSR, Wintermute and Keyrock. 

Animoca offers the market making service through an in-house Digital Asset Team, which was set up in early 2022 and is today made up of ten employees, according to a spokesperson for the company. They described it as “essentially a treasury team” that also handles setting up nodes and hedging, helping to offset the volatility of Animoca’s vast trove of volatile tokens. 

“Its primary role, much like the treasury teams in many large corporations, is to optimize the utilization of the company’s balance sheet,” the Animoca spokesperson said. “The team does conduct market-making to ensure there is enough buy/sell liquidity for certain tokens, which is similar to the function that third-party market makers conduct, except that we choose to perform this in-house for scale and efficiency.”

Animoca has pitched its Digital Asset Team’s capabilities to portfolio companies, as well as, in rare cases, to external companies where it sees potential alignment. Open Campus, an education-focused protocol, is one example of a client of the service.

The role of market makers

Market making is not unique to the world of cryptocurrencies. On Wall Street, similar firms play a crucial role in ensuring an adequate supply of liquidity for investors and traders, allowing them to smoothly buy and sell stocks or assets. In crypto, there are also companies that specialize in market making for a particular token. Token market makers provide services directly to projects, often with the goal of supporting a successful market launch, strong trading activity and reduced price volatility.

But the existence of such teams within crypto outfits that offer a much wider range of services has in the past proven controversial. 

The derivatives exchange BitMEX — which is no stranger to accusations of insider trading — recently called for the industry to phase out internal market making desks. That came off the back of a Financial Times report on Crypto.com’s internal trading and market making teams, which raised concerns about potential conflicts of interest. 

“If the asset issuer controls the trading strategy, similar to FTT and Alameda, it would be the equivalent of Tesla or Amazon market making their own stock. There’s a clear conflict of interest with internal trading desks in crypto as it’s hard to avoid market manipulation and insider trading restrictions,” said Matt Batsinelas, founder of Glass Markets, a liquidity and market making analytics provider. 

Animoca’s spokesperson, however, stressed that its Digital Asset Team “is not an in-house trading desk that takes on proprietary trading positions” — in other words it does not trade tokens for profit. The services offered by its Digital Asset Team are “optional add-ons that are negotiated on an arm’s length basis.” 

“Before we extend any such service, prospective companies are subject to an extensive selection process to ensure they align with our standards and policies,” they added. 

As with most crypto outfits, the prolonged bear market that began last year has taken its toll on the trove of tokens amassed by Animoca. In May, the company said the value of its token reserves had fallen 36% to $2.7 billion. A more detailed picture of the firm’s financial position is not currently available, as Animoca — which was previously listed on the Australian Securities Exchange — only published accounts for 2020 as recently as June this year. 

Disclaimer: Evgeny Gaevoy, the founder and CEO of Wintermute, sits on The Block's board of directors and is a shareholder.