Count this as the latest sign that the market for crypto prime brokers is overheating.
On the heels of a new partnership with Japanese investing giant SBI Holdings, crypto market-making firm B2C2 has announced plans to expand its business to cover a range of services that it says would bring it closer to becoming a crypto prime broker. The move follows a flurry of prime broker-related news from firms like BitGo, Coinbase and Genesis Global Trading.
Among the oldest operating market-makers in the digital asset space, B2C2 is best-known for helping large investors execute multi-million dollar trades over-the-counter. This month, the UK-based firm will roll out new automated financing services to complement its existing execution services.
At the same time, SBI Holdings will take a $30 million stake in the firm, offering access to its balance sheet. SBI Securities is Japan's largest online stock trading companies.
In traditional finance, prime brokers sit between institutional investors and the market, offering an array of services, including custody, execution and consulting. Market participants have long said that the addition of prime brokerage services to the crypto market could lure institutional investors from the sidelines. Prime brokers, in theory, make the trading and investing experience more seamless and capital-efficient.
B2C2 CEO Max Boonen said B2C2 is uniquely positioned in what is becoming a crowded market given his background in traditional financial services, noting his experience managing both a $60 billion net notional book of FX swaps and a $50 billion repo book. Boonen said B2C2 also will be able to deliver execution and financing at a cheaper rate than its rivals thanks to several factors, including "SBI's firepower" and "top notch" credit quality.
"Our credit quality is seen as top notch, being market neutral and having been in the market since 2015 and surviving crashes, bear markets, exchange hacks," he said.
It also has an established client-base, which now includes SBI. B2C2 will serve as SBI's main crypto liquidity provider as the firm expands its own crypto offering to millions of its clients, B2C2 said in a press statement.
"We expect a lot of synergies with B2C2, a firm which has a large number of clients globally and offers abundant liquidity, excellent price competitiveness, and a diverse suite of products for their customers," Yoshitaka Kitao, President and CEO of SBI Holdings, said. "We will work to develop innovative new crypto products and deepen synergies across our group of companies."
Companies across the crypto space are coming from different angles to build a prime business.
On the custody front, firms like Fidelity Digital Assets and BitGo are moving in the direction of prime, whereas aggregators and execution businesses ranging from FalconX to Bequant follow a similar path. Coinbase — via its acquisition of Tagomi — looks poised to get in on the action as well.
Still, it takes a lot to be a winner in this market, according to several participants who summed up the main components of a prime brokerage as follows:
- Financing of positions: The ability to offer leverage, borrow and perform cross-platform collateralization.
- Operational excellence: Settlement, custody, and accounting services.
- Market access: Unbiased trading services that offer access to the entirety of the market.
"A major part of prime broker offerings is trust," added Dave Weisberger, who said that in traditional markets, "that means extreme measures to prevent misuse of client information including walling off proprietary and principal trading activities from the PB division."
As for market access, clients will only have access to B2C2's market whereas other aspiring prime brokers in the market plan to route to several other venues.
Indeed, one industry executive questioned whether it made sense for a market maker to go this route, noting that such firms in traditional markets have shied away from customer-facing businesses.
"Look at the best liquidity providers in the business: Hudson River, Virtu: none of them are prime," the person said.
Generally, there is perceived risk that trading shops acting as prime brokers may not trade in the best interest of a prime client. Boonen said the B2C2's record speaks for itself, in that respect.
"Not only has B2C2 become the #1 e-dealing desk, it did so while operating within the parameters of a regulatory license, unlike its competitors," Boonen said. "Our reputation for probity is unmatched and our company's culture puts our clients' interests first."
Genesis Global Trading, which announced a similar move earlier this year, said it would divide its prime brokerage business and trading platform to avoid conflicts.
"It's an approach that is sensible for them and I have a lot of respect for their achievement on the lending side," Max Boonen said of his rival's move. "Would B2C2 consider doing so? Most definitely."
© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.