How pivoting into digital assets is offering a lifeline to the firms that birthed them

For the biologists among us, you'll have spotted that crypto is seeing something akin to matriphagy: the phenomenon where insect-offspring eat their mothers. In this case, the child is the crypto spin-off, set up by the old-guard of traditional trading who now represent the dead parent, being cleared up by its offspring.

There are at least two examples of this. 

The first is trueDigital; a crypto company set up in 2017 by finance-heavy weight Sunil Hirani and his firm, trueEX - a dealer-to-client swap execution trading platform. For the last two years, trueDigital has steadily risen, set to launch certified bitcoin swap contracts.

Meanwhile, trueEX has been dampened by a string of failed lawsuits, after nearly ten years of trying to take on major players in the swaps industry. And last week, trueEX announced it was shutting down.

In a strange twist of fate, investors' hopes now rest in the crypto venture they helped spin out. Indeed, trueDigital has wasted no time in trying to snag the core assets up for sale, including trueEX's derivatives trading licenses. trueDigital also confirmed to The Block that it had brought on various trueEX employees and is eyeing other parts of the dwindling business as it builds out a crypto exchange.

"We will look at anything that is of interest," trueDigital CEO Thomas Kim said in an interview, noting that trueEX's position means his firm has gotten an unusually good deal. "It's a bit bittersweet...We seized the opportunity to basically acquire their DCM and SEF [swap execution facility] registrations, which is in line with our strategic plan...and effectively shortens the effort to register from scratch by a year."

Whether or not it works remains to be seen, but trueDigital's crypto project has at least thrown them a lifeline.

Moreover, trueDigital is not the only crypto spinoff helping rescue its defunct trading counterpart. Most obvious is ErisX, the institutional crypto exchange birthed from the failure of Eris Exchange, a platform which aimed to offer disruptive futures products in traditional finance. With margins small and slow progress as an outsider, the firm pivoted to crypto over the course of a year; a long and windy path according to an ErisX investor. And while ErisX is yet to show it can survive and can host serious volumes, the consensus is that it has brought a once faltering exchange back into the limelight. 

But why crypto?

The logic underpinning each of these cases seems to be a shared faith that demand for crypto will increase and that the asset-class is far easier to compete in than traditional swaps.

"Crypto is easier [than traditional finance]: there are lower barriers to entry, and there are no major incumbents to compete with. Crypto is also way more lucrative," explains Larry Tabb, founder of research centre Tabb Group.

He added: "There are also overlaps in the regulatory bodies in that both are managed by the CFTC. So it makes sense once you've got the SEF license - a medallion really - to convert that into crypto, where the economics are good."

Indeed, rather than going up against major incumbents, trueDigital and Eris X are hoping to be the first to the mark, buoyed by the "wonderful" cooperation of the CFTC, according to Kim. The two firms also share an ideological root in that Eris was funded by Don Wilson while trueEX was founded by Sunil Hirani; both of whom were partners in Digital Asset.

David Mercer, who runs LMAX Exchange and its crypto subsidiary, LMAX Digital, also says it’s no surprise that trading firms are eyeing up the nascent crypto market to find new areas to compete in and to hedge against turmoil. 

“I can see how it’s possible for these crypto arms to become bigger than the traditional finance sectors,” he said. “In some cases, they’re already outgrowing them.”

At his own firm for instance, although LMAX Exchange sees far greater volumes than the crypto division, he says it took LMAX Digital just 5 months to break even, while it took the main parent exchange 3 years.

The charts below compare how LMAX's traditional exchange grew in its first twelve months (71%), and that of its crypto division (150%).

Source: LMAX

The most recent addition to the space is TP ICAP, the world's largest interbroker, which recently announced it would act as an intermediary to customers who want to trade regulated Bitcoin futures to one another. TP ICAP has long handled trades for major banks but the company lost 36 per cent in market value in a day last year after issuing a profit warning. So now, the firm has broken ranks and chosen to venture into bitcoin, launching in London.

It seems there's not just an opportunity for traditional financiers in the digital assets space; there's also often salvation to be found.