As much as blockchain technology promises to improve the plumbing of financial markets, crypto still has a lot to learn from traditional finance when it comes to reducing conflicts of interest and safeguarding client funds, according to Duncan Trenholme, global co-head of digital assets at TP ICAP, the world’s biggest interdealer broker.

Following a year that saw the collapse of exchange giant FTX, crypto lender Celsius and hedge fund Three Arrows Capital, Trenholme sees crypto as an industry that missed some basic lessons around protecting users in its rush to build new technology.

“It doesn't matter what technology, what asset class, if you allow venue providers to also participate in the order book that is a clear conflict of interest,” Trenholme said in an interview in London this month. “If you allow venue providers to hold customer funds — again, that is a clear conflict of interest.”

Now that the dust of 2022 — crypto’s annus horribilis — is settling, Trenholme is hopeful that the giant institutions that dominate global finance will eventually regain their appetite for digital assets. And while his small team represents a tiny fraction of TP ICAP's more than 5,000 staff, he’s steadily building it out to meet that demand.

TP ICAP’s crypto ambitions

TP ICAP first announced its plans to set up a cryptoasset exchange back in 2021 and won approval from the UK regulator in December of last year. The broker is currently onboarding clients to the platform, known as Fusion Digital Assets, but is yet to announce a formal launch date.

Onboarding takes time because — to ensure the aforementioned separation of funds — clients have one relationship with TP ICAP, where trades are executed, and another with Fidelity Digital Assets, a custody partner who keeps their assets secure.

“We thought it was incredibly important to have that segregation and make sure that the venue isn't holding the funds. And we've obviously seen that play out in the last 18 months — the reasons why,” Trenholme explained. “Finance has already learned those lessons in its history and therefore we have clear regulation for it in traditional markets.”

Carbon trading on the blockchain

As TP ICAP builds out its capacity to offer trading in digital assets, some more "forward thinking" clients have been keen to explore the potential. Attracting an audience beyond these early adopters, however, will require crypto to offer a superior experience to traders, Trenholme said.

“Ultimately, if it's going to work, it needs to be dramatically better than the way they currently trade.” 

According to Trenholme, traditional markets most ripe for improvement by the addition of blockchain technology include bonds, where the cost of settling trades can be high, and carbon credits, where trades sometimes fail to settle at all.

Most carbon credit transactions happen on an over-ther-counter basis between two parties, away from an exchange, he explained. These deals can sometimes fall apart 10 or even 20 days afterwards, because the settlement process — where the buyer’s cash is officially swapped for the seller’s securities — is so slow.

TP ICAP isn’t alone is seeing potential for crypto technology to benefit the carbon markets. Professional services giant EY last week launched their own Ethereum-based platform for enterprises to track their emissions.

Real-world crypto use cases

For Trenholme, however, the real excitement will start if more businesses start using crypto as the basis for real-world economic activity.

To illustrate what that would look like, he gave the example of an airline deciding to issue NFTs to customers as part of a loyalty program. That airline might suddenly find itself holding a chunk of ether or polygon and then needing to hedge that price in the market — as they would with their fuel — to make business planning easier.

Financial markets of the kind TP ICAP runs — whether commodities, equities, bonds or crypto — only exist to support and facilitate those real-world business decisions.

“When we start to see more firms that come to a wholesale market as a byproduct of doing some form of economic activity where they are essentially using blockchain tech and using using Ethereum or Polygon or whatever as a means of doing something — I think that's going to be the the sign of growth in the ecosystem,” Trenholme said.

If and when more airlines find themselves needing to hedge their polygon exposure, TP ICAP wants to be right there, ready.

“There’s this new asset class: crypto. We want to do the same role we do in traditional markets — which is provide a big secondary market, a professional secondary market — and we want to do that for crypto.”


Read the full article on The Block here.