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Wall Street is warming up to crypto

Despite a downturn in crypto markets, more large institutional investors are seeking to invest in crypto.

One factor holding them back is a lack of infrastructure for large institutions compared to what exists in the traditional, regulated capital markets.

That’s changing, as technology infrastructure for crypto starts to mature in areas ranging from security to data. One area that’s being built out is crypto trading as a service, with APIs and other products that developers and companies can use to set up crypto trading for their clients.

The latest sign of this maturation is EDX, a new exchange for digital assets that’s being developed by Wall Street players like Citadel Securities, Virtu Financial, Fidelity Digital Assets, and Charles Schwab, as well as venture capital firms Sequoia Capital and Paradigm.

The digital exchange, headed by former Citadel Securities executive Jamil Nazarali, is roughly modeled on and built on the trading technology of Members Exchange, or MEMX, another exchange that’s being developed by similar companies as an alternative to large stock exchanges such as NYSE and Nasdaq.

EDX’s custody and settlement technology is being provided by crypto custody and infrastructure company Paxos, the companies planned to announce Wednesday.

Paxos, which is a custodian regulated by New York state, holds customer accounts in fully segregated accounts and has signed up large consumer-facing clients to enable crypto trading. Its customers include PayPal, broker dealers such as Interactive Brokers, and others such as Nubank and Mastercard. Paxos has a conditional bank trust charter from the OCC and says it expects its chartered entity, Paxos National Trust, to open later this quarter.

Up until now big banks haven’t moved heavily into crypto because of accounting, risk, security, and regulatory concerns, as well as requirements by the Federal Reserve and a desire for more mature technology, said Walter Hessert, head of strategy at Paxos. “We still haven’t seen any of the big bank holding companies in the U.S. bring one of these offerings to market,” he added.

EDX, with its leadership and backing from Wall Street firms, could attract large banks into digital assets, he said. EDX is “bringing traditional market structure and also traditional market participants to this liquidity offering through the exchange that is going to be really built to support and attract these types of bank holding companies and brokerages,” Hessert said. For example, EDX plans to offer delivery settlement versus payment settlement, a settlement method that’s used in traditional securities trading.

EDX is also different from some other crypto providers that are the market maker, exchange, and custodian all in one, which can be a conflict of interest and is typically not done in traditional markets, Hessert said.

More large liquidity pools such as EDX will also increase transparency for the crypto market, Hessert said. Presently, crypto markets can be opaque, with large spreads and high volatility.

The competition to provide crypto trading, custody, security, and related technology for large institutions is intense. The resulting consolidation wave isn’t without some hiccups: Wyre canceled its deal to be acquired by Bolt for $1.5 billion last month. But more deals could soon come in this sector, since numerous providers offer overlapping services, analysts say.

Coinbase provides crypto trading APIs, custody, payments API, and related services, seeking to lure big and small customers alike. Coinbase has three related APIs — a general-purpose one for trading, deposits, withdrawals, and tax reporting; another for streaming market data; and a specialized FIX API for sophisticated traders. Coinbase, which recently announced a deal with BlackRock, has an advantage in routing orders to its own exchange or, for large customers using its Prime API, to other liquidity providers.

A number of other API providers like Prime Trust, MoonPay, Wyre, and Transak have emerged to offer quick and easy connections to crypto trading and other services, particularly for fintech and crypto developers building apps. Custody providers such as Anchorage and Fireblocks also offer crypto trading. And others are jumping in: Stripe has announced products for merchants to pay out in crypto or convert fiat to crypto.

“The convergence we’re seeing in the industry is people are moving up and down the value chain, because competition has heated up,” said Sara Xi, chief product officer at Prime Trust. “So the more you cover in the value chain the more revenue sources you have.”

DriveWealth, which provides stock trading as a service to customers such as Revolut and Cash App, has expanded into crypto and acquired a smaller firm, Crypto-Systems. The company can send crypto trades to multiple exchanges and liquidity sources to get best prices, said Duncan Wells, market strategist at DriveWealth.

Paxos provides custody, trading, and wallets for PayPal’s crypto offering. PayPal in July announced that its customers could send and receive crypto, not just buy and sell as before. While consumer interest in crypto may be down with the overall market, this latest move has quietly opened up a range of future new uses to PayPal’s large customer and merchant base.

“The on-ramps that have now been created through trusted products, it’s an order of magnitude more than where it was before PayPal launched these transfers,” Hessert said.

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