US crypto exchange FTX US has confirmed that it will be making a strategic investment into IEX Group, the operator of the US-based Investors’ Exchange, in order to develop a transparent market structure for the buying, selling and trading of digital asset securities.
The question of crypto regulation has long been a thorny problem , and FTX US has been clear about its ambitions to become a regulated exchange, working with regulators to create a platform that enables both retail and institutional engagement with digital assets.
The new partnership with IEX, an alternative trading system first launched in 2013 with a focus on investor protection, is another step down this road.
“To unlock its full potential, the crypto and digital asset industry needs to engage with regulators and truly scale what has been built,” said CEO and Co-Founder of IEX, Brad Katsuyama.
“From the first conversation with Sam [Bankman-Fried, CEO of FTX and FTX US], it was clear to me that FTX and IEX were truly aligned on the future potential for digital assets and the unique roles our firms could play as partners in shaping market structure that benefits the end investor. We both see the regulators as important allies in providing a clear path forward and attaining the highest possible standards for investor protection. The US market should be the largest player in digital assets globally and we believe that this partnership will help facilitate that.”
Earlier in March, parent company FTX Trading partnered with US-based crypto platform West Realm Shires Services to launch a new unit targeted at institutional investors. FTX Access will initially provide institutional investors interested in gaining exposure to digital assets with trade execution, analytics, index products, advisory services and capital introductions, with plans to expand into custody, derivatives, structured products and other asset management products later down the line.
The recent developments accompany a growing interest in regulatory oversight for the sector. On 9 March, President Biden signed into law the ‘Executive Order on Ensuring Responsible Development of Digital Assets’, the first real attempt by US authorities to comprehensively address supervision of the fast-growing crypto space – including the potential development of a US central bank digital currency.
“The order is a significant step toward developing a comprehensive federal approach on digital assets,” explained law firm Shearman & Sterling in a recent analysis. “Although the order does not prescribe a regulatory framework itself or require the issuance of new rules, it directs various parts of the federal government to issue reports and recommendations on potential regulatory or legislative actions concerning digital assets.”
In November 2021, non‑state issued digital assets reached a combined market capitalisation of $3 trillion, up from approximately $14 billion in November 2016, marking a compound annual growth rate of 192.5% over the past five years, and this explosive growth has not gone unnoticed.
“The unique and varied features of digital assets can pose significant financial risks to consumers, investors, and businesses if appropriate protections are not in place,” stated President Biden in March. “In the absence of sufficient oversight and standards, firms providing digital asset services may provide inadequate protections for sensitive financial data, custodial and other arrangements relating to customer assets and funds, or disclosures of risks associated with investment.
The latest partnership between FTX and IEX Group looks to be preparing for the potential advent of further regulation, and the two firms have promised more information in the coming weeks on how they plan to broaden investor participation in the digital asset securities market – including a new initiative encouraging all investors to join the conversation about the future of market structure for digital asset securities.
“Investing in IEX created a tremendous opportunity for FTX US,” commented Bankman-Fried. “With this investment, we’re aligned with one of the most trusted and innovative companies in equities markets. I’ve long respected Brad’s vision for IEX to be an exchange that caters to the needs of the investor and treats them fairly – part of the reason why we’ve operated similarly at FTX. As a result, we will collaborate on the further establishment of crypto market structure and work closely with regulators, allowing institutions around the world to enter the marketplace seamlessly.”
The move comes as institutional interest in digital assets continues to grow. In December 2021, research from London-based digital assets hedge fund manager Nickel Digital Asset Management revealed that over $60 billion worth of Bitcoin is currently held through various Bitcoin closed-ended trusts and exchange traded products, with US and Canadian funds accounting for an overwhelming 75% of the holdings.
Anatoly Crachilov, CEO and founding partner of Nickel Digital, said analysis of digital assets performance versus traditional asset classes shows sizable outperformance by digital assets over the medium to long term. “This helps explain the increasing interest in digital assets by corporations and institutional investors as part of their wider asset allocation.”
In January, MSCI moved into the digital asset sphere for the first time through a collaboration with institutional digital asset investment product and services provider, Menai Financial Group; while sector is also creaming off industry talent, poaching numerous high-level executives from more traditional roles.
Most recently, decentralised Financial Market Infrastructure (dFMI) firm Bosonic hired former global head of LCH ForexClear, Paddy Boyle, as its global head of clearing and derivatives; while in November 2021 Citi promoted Puneet Singhvi from its global markets business to head up digital assets for its institutional client group, with plans to hire up to 100 more within the division.