Leading digital asset platforms make their move into prime brokerage

As digital asset firms look to reach institutional investors, the largest players have realised the need for prime brokerage services and appear to have all made their moves at once.

By Jonathan Watkins

Three of the largest digital asset platforms have moved into the crypto prime brokerage space over the past seven days, as the importance of the function to attract institutional investors becomes abundantly clear. 

Genesis, Coinbase and BitGo  three of the largest players and biggest advocates of institutional uptake of digital assets investing  confirmed either acquisitions or new launches this week, adding a key component to crypto market infrastructure. 

The combination of lending, custody, trading services and settlement agency services  among others – is crucial for institutional investors who do not want to deal with the current complexities of the digital asset market in its current form. 

Genesis acquired digital asset prime brokerage Vo1t to supplement its existing services, which included global over-the-counter trading and institutional lending, enabling the platform to launch its prime services business later this year. The firm added that it also plans to build an integrated client interface, create additional technology solutions, launch a derivatives trading desk, and add capital introduction capabilities for hedge funds, quant funds, asset managers, and family offices. 

Meanwhile Coinbase  the popular retail platform looking to break into the institutional investment world – purchased Tagomi, another digital asset prime broker, as it committed to pushing forward in building the ‘crypto-economy’. 

With the deal expected to close later this year, Coinbase said it is building the foundation for the “next wave of crypto investors by bringing onboard the first electronic prime brokerage in crypto.” 

Finally, BitGo, launched its own prime services this week, with former Tower Research and Deutsche Bank executive, Nick Carmi, appointed to lead the initiative as CEO, which will give institutional investors a suite of services mirroring the traditional finance world. 

As digital asset platforms look to reach the lucrative segment of institutional investors, they are collectively adding crucial market structure cogs such as custody, fund administration and prime brokerage to their services.  

The offering differs slightly from the traditional prime brokerage functions in the capital markets with some aspects missing, however trading services, custody, credit lines and lending appear to be part of the biggest digital asset platforms’ plans. Much like the traditional space, there could be a wide range of prime brokers in the years to come, but a dominant handful at the top end. 

“As the cryptocurrencies trading ecosystem continues to evolve, market participants are calling for the same services provided by prime brokers in traditional markets, including security lending, asset custody, and settlement agency services. The role of prime brokers does not exist in the cryptocurrencies market, and firms that are able to provide full or partial prime brokerage services will prevail in this market,” a report from Aite Group last year said.  

The introductions come at a crucial time as both the number of hedge funds and their assets under management (AUM) continue to grow.  

A report from PwC earlier this month revealed that total AuM of crypto hedge funds globally increased to over $2 billion in 2019, doubling from the previous year. The percentage of crypto hedge funds with an AuM of over $20 million also increased from 19% to 35%. Meanwhile81% of crypto hedge funds are now using a custodian, up from 52% in the previous year, according to the report.  

While crypto-specific hedge funds continue to grow, the digital asset industry is still awaiting full buy-in from asset managers, hedge funds and asset owners as they await a fully-established market infrastructure, regulation and legal and risk frameworks.