Over-the-Counter Trading as the Latest Battleground to Secure Institutional Investment

With the increasing trend for major financial institutions to invest in Bitcoin, United States crypto exchange and wallet provider Coinbase announced the launch of over-the-counter (OTC) trading for institutional customers on Nov. 27.

OTC trading allows investors to carry out direct trades with each other. It means that the company’s institutional users won’t be trading through a crypto exchange or an intermediary.

Coinbase’s latest trading initiative began on June 6, when President and COO Asiff Hirji explained that obtaining a regulatory license would enable the company to set off on a “path to offer future services that include crypto securities trading, margin and over-the-counter (OTC) trading, and new market data products.”

Coinbase is not the only cryptocurrency exchange that has cottoned on to the potential benefits of attracting the ever-growing customer base of institutional investors.

On Dec. 4, U.S.-based cryptocurrency exchange Poloniex also reported the launch of their own institutional service. Much like its competitor, Coinbase, Poloniex is steadily increasing the number of services it offers to customers. As previously reported by Cointelegraph, institutional customers looking to use Poloniex’s dedicated accounts will be able to do so, subject to a minimum trade of $250,000. Poloniex is currently the 47th-largest crypto exchange in the world by trade volume. The company’s blog post claimed that:

“Institutions large and small can enjoy the benefits of [...] [a] large curated selection of crypto asset trading pairs, dedicated support and robust API services. [...] Poloniex is focused on meeting the advanced trading needs of institutions.”

Russia’s state-owned bank Sberbank carries out major OTC transaction

Other financial players around the world are also looking for innovation opportunities.

On Nov. 30, 2018, Sberbank, Russia’s state-owned banking and financial services company, and Interros, a Moscow-based conglomerate, processed an OTC foreign exchange repurchase agreement transaction using smart contracts via blockchain, Reuters reports.

Although the scale or value of the transaction are yet to be publicly disclosed, Head of Global Markets and Vice President at Sberbank Andrei Shemetov indicated that “the amount corresponded to the average volume of the interdealer repo transaction.”

Shemetov also told Reuters that the deal was fully legally binding and was “concluded in electronic format using a smart contract and digital signature through the IT platform of Sberbank.” The article reports that the smart contracts used in the transaction have been written in the Go programming language and were deployed on the Hyperledger Fabric Platform, a system that allows for real-time monitoring of “covenants and other market conditions.” Shemetov is also bullish on future prospects for blockchain to improve services offered by the bank:

“In the long term, the conclusion of transactions through the blockchain platform will reduce transaction costs and errors through automation, as well as increase transparency and trust among all participants in the financial market.”

This is not the first time that Sberbank has been associated with a progressive outlook on both crypto and blockchain technology. Earlier this year, Sberbank CEO Herman Gref stated his belief that blockchain would be implemented across the sector on an industrial scale in one or two years. Prior this, Gref has consistently displayed interest in cryptocurrency, in spite of Russia’s chequered past with crypto in general.

MVIS launches Bitcoin index based on major OTC desks

Another company to jump on the OTC bandwagon is MV Index Solutions, a subsidiary of VanEck that develops, monitors and licenses MVIS indices. MV Index Solutions launched its Bitcoin index based on three major OTC desks in November.

MVIS Indices cover multiple asset classes, including fixed income markets, digital assets and equity. The MVIS Bitcoin U.S. OTC Spot Index (MVBTCO) draws on feeds from major OTC liquidity providers, including Circle Trade, Genesis Trading and Cumberland.

The VanEck’s Director of Digital Asset Strategies, Gabor Gurbacs, expressed his belief that their new OTC index would benefit the ongoing trend in the crypto market:

“The index may pave the way for institutionally oriented products, such as ETFs [exchange-traded funds] as well as provide further tools to institutional investors to execute institutional[-]size trades at transparent prices on the OTC markets.”

Institutional trend continues to grow

On Oct. 31, Morgan Stanley, a multinational investment bank and financial services company, released their most recent report on Bitcoin, entitled “Update: Bitcoin, Cryptocurrencies and Blockchain.”

The report documents how major financial players capitalized on the stablecoin trend, along with how central banks and regulators are gradually warming up to the idea of more mainstream adoption both of Bitcoin and of blockchain technology as a whole. Along with the new classification of Bitcoin as an institutional investment class, the institutional trend is also spreading out into the benefits of OTC trading.

Bloomberg reported how institutional investors replaced high-networth players as the biggest buyers of cryptocurrency transactions over $100,000 and how the possibility to conduct OTC trades has drawn in hedge funds, injecting huge amounts of capital into the market. According to findings from Digital Assets Research and TABB Group, the OTC market brought in between $250 million to $30 billion in trades per day in April.

Improvements in trading through exchanges are, however, being made. In November, the Depository Trust & Clearing Corporation (DTCC) announced its replatforming of its Trade Information Warehouse using distributed ledger technology. The project involved significant work in improving the scalability of blockchain in dealing with large- and high-volume transactions on exchanges.

Known as “Wall Street’s bookkeeper,” the DTCC accounts for 98 percent of derivatives transactions worldwide, including around 40 million OTC transactions weekly and 1 billion communications monthly.

Jennifer Peve, managing director of business development and fintech strategy at the DTCC, stated that increased scalability was beyond initial expectations and that their replatforming would help build confidence in the sector.