Welcome to The Fintech Files, your weekly roundup from FN’s fintech correspondent Ryan Weeks, keeping you up-to-date with the latest developments in financial tech and innovation.
From high-profile hacking incidents to a deceased founder reportedly taking the means of accessing the equivalent of hundreds of millions of dollars to the grave, cryptocurrency exchanges are no strangers to scandal.
On November 12, a membership body representing a number of leading cryptocurrency companies issued its first code of conduct in the hope of improving standards in the market.
The Association for Digital Asset Markets (Adam), whose 10 founding members feature top crypto liquidity providers including GSR and Genesis Global Trading, also announced five new members, including digital wallet provider BitGo and crypto custodian Anchorage.
The code, which members are expected to stick to from early 2020, aims to set standards in areas including “market ethics” and “transparency and fairness”.
A representative of Adam said that in the absence of widely agreed guidelines across cryptocurrency markets, “bad actors were undermining confidence in the entire asset class”.
“More than any specific areas of misconduct, it was the general lack of clarity around best practices, and the absence of comprehensive regulatory standards, that led Adam’s members to believe that industry-led standards were necessary,” he said.
Richard Rosenblum, co-founder of GSR and a former commodities trader at the investment bank Goldman Sachs, told Fintech Files that the most common example of bad activity stemming from crypto exchanges is wash trading, which is addressed directly in the code.
Wash trading is when a market participant buys and sells the same asset in a short period of time, creating the appearance of market activity even though the asset is not really changing hands.
For exchanges, Rosenblum said, “you can see why it’s very tempting to report fake volume”. He added: “Where there’s volume, volume begets liquidity,” which for traders means more competitive (and therefore fairer) prices.
If a few exchanges engage in wash trading, it is hard for others not to follow suit. Rosenblum explained: “Once it’s pervasive, even the good actors don’t know what to do, because if they don’t partake in it, then they can look small in comparison.”
The world’s biggest crypto exchanges have also rapidly expanded the range of services they offer, which raises the potential for conflicts of interest. Exchanges that are in the business of clearing and settlement, over-the-counter trading and principal investment are conflicted, Rosenblum said.
“It just creates an unfair advantage,” he added.
The problem for Adam is that not a single exchange is signed up as one of its members, challenging the notion that this is an example of the industry regulating itself.
Andy Bryant, European co-head and chief operating officer of BitFlyer, the crypto exchange, said: “My sense is that it is difficult for a fresh new self-regulatory organisation such as Adam to recruit a long list of members in the early stages. A new self-regulatory organisation may not yet have the momentum or official recognition, it may be one of many duplicate efforts with no clear primacy.”
It is hard to imagine many exchanges endorsing Adam’s code, never mind enforcing it. But that may change in time; it would not be the first example of self-regulatory standards informing the development of full-blown regulation.
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A scoop from us to end last week on: the Japanese investment bank Nomura has won a licence for its crypto custody business from regulators in Jersey. The service has been developed over the past 18 months in partnership with Global Advisors Holdings, parent company to the $700m crypto asset manager Coinshares, and the blockchain firm Ledger.
Nomura’s win came just days after Fidelity, the fund manager, secured a New York licence for its own digital assets business, which focuses on storing and trading bitcoin.
A new €150m venture capital fund targeting fintech investments in Europe and North America has launched with three initial investments in UK companies, according to AltFi.
Indian payments pioneer Paytm has secured $1bn in fresh funding at a $16bn valuation from existing investors, including the SoftBank Vision Fund, according to Bloomberg.
Revolut has hired Pierre Decote as chief risk officer, the latest in a string of senior appointments by the digital bank.
When FT Alphaville poses a question such as “Can fintech bridge the inequality gap?” the answer is generally worth reading.
Last but not least, Mark Barnett, protégé to disgraced fund manager Neil Woodford, has sold a multimillion-pound stake in a direct lending trust amid liquidity fears, in the same week that another lending trust in which he holds shares took a big hit, according to a Citywire report.
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