The largest interdealer broker, Trenholme, believes crypto has a long way to go in terms of protecting users and reducing conflicts of interest.
TP ICAP, a leading provider of market infrastructure, is bullish on the potential of blockchain technology to transform financial markets but wary of the current state of the crypto industry.
Duncan Trenholme, global co-head of digital assets at TP ICAP, said in an interview that crypto needs to adopt some of the best practices of traditional finance to safeguard client funds and avoid conflicts of interest.
Crypto’s annus horribilis
Trenholme’s comments come after a year that witnessed several major scandals and failures in the crypto space, including the collapse of exchange giant FTX, crypto lender Celsius and hedge fund Three Arrows Capital.
According to Trenholme, these incidents revealed some of the flaws and risks of crypto as an industry that, in its haste to develop new technology, skipped some basic lessons regarding user protection.
“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,”. “If you allow venue providers to hold customer funds — again, that is a clear conflict of interest.”
Duncan Trenholme
The crypto ambitions of TP ICAP
TP ICAP initially declared its plans to set up a crypto asset exchange in 2021 and received approval from the UK’s regulatory body in December last year.
The broker is onboarding clients to Fusion Digital Assets platform but has yet to announce an official launch date.
Onboarding takes time because — to ensure the separation mentioned above 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 are eager to investigate the potential. However, attracting an audience beyond these early adopters 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 adding blockchain technology include bonds, where the cost of settling trades can be high, and carbon credits, where transactions sometimes fail to settle.
He explained that most carbon credit transactions occur directly between two parties outside an exchange.
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 in recognizing the potential for crypto technology to benefit the carbon markets. Last week, professional services giant EY launched their Ethereum-based platform for enterprises to track their emissions.
Real-world crypto use cases
However, Trenholme’s real excitement will start if more businesses use 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 its loyalty program.
This airline might suddenly find itself holding a chunk of ether or polygon and then needing to hedge that price in the market, as it would with fuel, to make business planning easier.
TP ICAP’s financial markets — whether commodities, equities, bonds, or cryptocurrencies — only exist to support and facilitate these 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 Ethereum or Polygon or whatever as a means of doing something — I think that’s going to be the sign of growth in the ecosystem,”
Duncan Trenholme
If and when more airlines find themselves needing to hedge their polygon exposure, TP ICAP intends to be there to assist them.
“There’s this new asset class: crypto. We want to do the same role we do in traditional markets — which provides a big secondary market, a professional secondary market — and we want to do that for crypto.”
