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Can Prime Brokerage Open the Door to Institutional Access to Digital Assets?

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By Martha Reyes, Head of Research, Bequant.

It’s surprising how crypto markets have been repeating the same evolutionary cycles of infrastructure building as the traditional markets. As more established investors enter the crypto space, digital asset prime brokers are rising to the challenge to offer technology-driven solutions to many of the same challenges faced by traditional market participants.

According to Investopedia, a prime brokerage is a bundled group of services that investment banks and other financial institutions offer to hedge funds and other large investment clients that need to be able to borrow securities or cash in order to engage in netting to achieve absolute returns.

This may seem difficult to achieve in the crypto space, but it is how hundreds of traditional institutions are diversifying their portfolios and adding digital assets including cryptocurrencies. This month, for example, it emerged that Citigroup is hiring hundreds of staff to expand its digital assets division, giving an indication of the direction some of these institutions are taking. More broadly, tech giants like Facebook’s owner Meta and Twitter founder Jack Dorsey have jumped into the crypto space.

Having missed out on the post-Credit Crisis tech boom, investment firms will not want to be left behind this time. But getting involved in digital assets is challenging for regulated entities, and it’s far from clear how to connect, or indeed what to connect to.

This is where prime brokerage can help.

The first service that any digital assets prime broker should offer is market access. In digital assets, market participants are forced to deal with a highly fragmented market with scores of different exchanges, both centralised and decentralised. Prime brokers like Bequant can help streamline access to this fractured marketplace, adding a level of certainty and due diligence that saves time and resources for regulated institutional investors.

Prime brokers can provide access to the liquidity in digital assets markets, with access to lending and borrowing through a single point of entry. They should also be able to add new markets as required, with speed and efficiency.

Fund managers need help in implementing their market strategies. Although a fund manager can set up a direct account with an exchange, a cross-margin account at a dedicated digital assets prime broker will allow that manager to cross-margin their assets and be more capital efficient. Cross-margining accounts allow fund managers to go long and short on different venues without being worried that they might get liquidated when the market moves.

Finally, the third key service that a digital assets prime broker should provide is a full suite of post-trade services, including clearing, settlement, and safekeeping of assets, with centralised clearing and reporting. Such a platform should be custody agnostic, integrating multiple different custodians with full automation of the process, thus providing the fund manager with peace of mind and full flexibility in the safekeeping of their digital assets.

If you don’t have your own OMS, Bequant supports FIX, API, and GUI connectivity. The Bequant API allows users to seamlessly connect from a single access point and place trades at an extremely low latency thanks to our colocation infrastructure. Through this single connection, Bequant offers traditional market participants a gateway into the world of digital assets.

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