"The guardrails haven't been found yet": The execs behind a big Wall Street bitcoin partnership say crypto is still in its infancy
- ICE, the parent company of the New York Stock Exchange, announced in January a partnership with Blockstream to a launch a data feed product to make cryptocurrency markets more transparent for Wall Street.
- A number of hedge funds and trading firms are testing the product, which went live in March, according to Lynn Martin, head of ICE's data business.
- We met up with Martin and Blockstream chief executive Adam Back to talk about the product, the development of cryptocurrency market structure, and a potential bitcoin exchange-traded fund.
It was a match made in heaven. Blockstream had the relationships with the crypto world. And ICE, the parent company of the New York Stock Exchange, had the data background.
Together, they launched a data feed product aimed at Wall Street to provide a clearer picture of the opaque cryptocurrency markets. The feed, which spits out more than 4 million data points a day, is now being tested by a number of trading firms and hedge funds.
The so-called Cryptocurrency Data Feed draws information that covers more than 65% of the market. The feed, which went live in March, joined a family of more than 450 real-time market data feeds already operated by ICE.
Whereas ICE's competitors - Cboe Global Markets and CME Group - have dived into bitcoin futures, ICE has focused on data, and adding transparency to the marketplace known for its wild price swings and fraud.
We recently met up with Martin and Adam Back, the chief executive officer at Blockstream, at the New York Stock Exchange to discuss the product, the development of crypto market structure, and a bitcoin ETF.
The following has been lightly edited for clarity and length.
Frank Chaparro: How did this partnership come together?
Adam Back: For our part we provide infrastructure technology to companies using bitcoin and blockchain - so bitcoin exchanges. We have an inter-exchange settlement mechanism called Liquid which is a blockchain for settling bitcoins between bitcoin exchanges. So we have partnerships with a number of exchanges and we were able to negotiate with them to have reliable access to their data feeds. Some of them are provided as a subscriber on a best effort basis but in order to provide it to institutional customers they have an expectation of reliability and standardized format. So we are pulling around 2/3rds of global volume into this feed and in multiple currencies. Between cryptocurrencies and fiat currencies, there are about 400 pairs and it is about 4 million data points a day. Subscribers can also download historic price data, which is useful for graphing. They can pull it into their broker terminal.
Chaparro: Something I've been looking at recently is the development of crypto-exchanges market structure. A lot of these exchanges lack a lot of the functionalities of an ICE or New York Stock Exchange. Certain order-types don't exist, matching engines are in the cloud, etc. How far off is this market from US equities?
Martin: I mean you are talking about apples and florescent neon signs when you are comparing the two. You are talking about the US equities markets, which are some of the most liquid in the world, huge international user base, retail, institutions, buy side, sell side, you name it. I don't think you actually can transact in financial markets and not have exposure there. You also layering on things such as Reg NMS, which has been an interesting regulation around linkages and preserving best bids and offers, when you are talking about some of the order types and pricing things. You are talking about a market that really was built 225 years ago and has had multiple evolutions as a result of various crises to a very new market. Crypto markets are very, very new. I like to say the guardrails haven't been found yet in this market. The regulatory framework hasn't been found yet in this market. That's why you don't find institutional users jumping in with feet first yet.
Chaparro: Fair enough. When we last spoke, you mentioned that transparency is what this market needs more so than futures, which your competitors launched at the end of 2017. Why do you think that is?
Martin: I think the market is going to have to be taken to the next level. But the only way that is going to happen though is if there is transparency, and if there are tools provided to allow folks to manage exposures effectively, across a wide-variety of venues, and not just a single venue. And they need to be able to do that in a reliable and trusted fashion. That's were data comes in. You can't really manage risk if you don't have a broad specrum of data. That's why we've gone more the data and technology route, as opposed to just throwing up a contract.
Chaparro: Adam, when you think about the development of this market, from a crypto perspective, do you think this is all in line with what Satoshi envisioned for bitcoin? Does it make sense for Wall Street to be so entangled around a technology many think can some day topple the financial-services industry?
Back: It's evolved in a short period of time. It's only really nine years or something. Think about the first few years. There were no exchanges. And then the additional exchanges were very small startups without very much traditional market experience. So things have been improving over time. And there are new entrants to the market all the time. On the retail side, Square has started offering cryptocurrencies. And Robinhood, which is a retail brokerage I guess, has also started. And the institutional interest seems to be a bit higher.
But a nice analogy would be physical gold ownership, owning a gold bar or having that with a custodian versus buying an ETF. For many people, they wouldn't want to hold physical gold in their house. They would sooner buy a position in the ETF. Those kinds of products have to filled in. There have been a number of new ETF filings put in. Initially they were by startups like Gemini. But since the futures there have been a number of Wall Street companies that have put in filings. And if you look at the regulators' initial comments on the previous filings, there were a number of complaints, one of them being insufficient pricing information and transparency. So I think there is a way to go there.
Chaparro: What could a bitcoin ETF do for the market?
But there's an issue: how do you maintain custody. So, with gold, people know how to do it because it is physical and so you have a lot of security around that. But managing security with bitcoin is tricky. And there have been mistakes. I think there is a good place for existing custodians, who have the regulatory coverage to be a custodian, to participate.
Chaparro: What has surprised you the most about this crypto market since launching this product?
Martin: What surprised me since we announced the feed is really the amount of interest. We have been working with a lot of customers throughout the ecosystem. Risk takers, the risk managers, people who just want a view as to what the overall market is doing. To help from a compliance perspective, an educational perspective ... it has amazed me the diversity of folks looking for this breadth of information. It is sort of rubber stamps that what we are doing is the right thing. People want a view.