Diginex, the Hong Kong-based blockchain services company, is using funding from a Nasdaq listing and recent fund raise to dive into crypto derivatives, says CEO Richard Byworth.
The firm founded a digital-assets exchange, Equos, in July. Byworth says the priority is to introduce derivatives products in order to boost volumes. The exchange’s daily turnover averages $5 million.
Today’s crypto derivatives volumes are three or four times the size of spot markets, a small ratio compared to traditional securities markets.
Institutions can finally see a Nasdaq-listed company
Richard Byworth, Diginex
The biggest derivatives players in crypto are unregulated exchanges offering high leverage, such as Binance Futures, BitMEX, OKEx and Huobi.
The CME, on the other hand, is a relatively small player, with contracts offering limited leverage – but its derivatives are regulated by the U.S. Commodities and Futures Trading Commission.
CFTC model
Byworth says Equos will adhere to the CFTC-regulated model. For now Equos operates out of Singapore and is not live in the U.S., and it is not yet licensed. The Nasdaq listing of Diginex is a step towards opening for business in the U.S. as a regulated entity, Byworth says, while retaining the firm’s Asian footprint.
“We see ourselves as a more global version of CME,” he said, noting the derivatives business model will operate similar safeguards, such as prohibiting Equos traders to make markets on the exchange (to ensure against front-running client positions).
Similarly Equos will pay for flow. The crypto industry norm is to make “takers” of liquidity pay 7 basis points, while rewarding “makers” of liquidity with up to 2.5bps commission.
“We want to work with regulators globally to roll out more security-style products,” Byworth said.
Build liquidity
The medium-term business aim is for Diginex Capital, the firm’s investment bank, to transform paper-based securities into digital structures that can trade on Equos. But tokenization of assets won’t take off until there’s more liquidity on the exchange.
“Today this is about the growth of the derivatives market, so clients can use bitcoin as core collateral.” This activity happens today via a range of exchanges and lending platforms, but these tend to be unregulated, and therefore at risk of fraud or, in the case of BitMEX, being targeted by regulators.
Building liquidity will help Diginex Capital create a prime brokering business, providing balance sheet and custody to investors that want to engage in swaps to lend out bitcoin for short-term yield, and write puts and calls to generate premium income.
We want to work with regulators globally
Richard Byworth, Diginex
Byworth says catering to this sort of demand will require the crypto futures market to diversify. Right now the main contract in the market is the perpetual future (pioneered by BitMEX), which because the contract has no expiry or settlement, provides stable prices. Traditional futures markets offer a variety of contracts whose price will vary because it references basis (that is, the difference between the spot market and a contract’s price).
“We are introducing the investment-banking and private-banking structure into the digital-asset ecosystem,” Byworth said.
Getting listed on Nasdaq is meant to win the favor of institutional investors such as family offices that are hesitant about the cryptocurrency world, he added.
“Institutions can finally see a Nasdaq-listed company where they can send their money,” he said.
Diginex achieved a backdoor listing on October 1 via a merger with a SPAC (special-purpose acquisition company) called 8i, making it the first blockchain services company to go public on Nasdaq.
The SPAC and an earlier funding round have raised a total of $50 million. Diginex is spending those proceeds on building an institutional sales team and investing in the software behind the firm.
