17 September 2024
Ian Simpson | 31 min read
Liquidity in markets is always key. What assets get traded (and price) is often dependent on how deep liquidity is across the market.
In crypto it is no different. Keyrock CEO and Co-founder Kevin de Patoul joined RULEMATCH Spot On to talk about liquidity and its development – along with the influence of different market models, the ongoing challenge for high frequency traders, as well as current (and future) bottlenecks in the growth of trading firms and market makers like Keyrock.
Episode show notes:
(00:41) Intro
(1:44) State of global liquidity
(3:03) The actual location of liquidity – geographically and spot vs options
(4:42) Breakdown of Keyrock’s business pillars
(6:12) The driving factors behind the founding of Keyrock
(6:40) Crypto as a proof-of-concept
(7:17) Where Keyrock got started – market making as a service provider
(8:53) Comparing crypto vs TradFi market making
(10:55) Why crypto’s retail history has hindered “the tech”
(12:54) Getting to more standardization and technical excellence
(14:18) How large orders from the world’s largest trading firms move through the crypto market
(16:07) Crypto ETFs as a sign of liquid markets
(16:52) Preparing for US Bitcoin ETFs
(17:50) Weekday vs weekend liquidity in crypto
(19:53) Stablecoins as a buffer
(20:14) State of play in crypto market models
(22:38) The fantastic speed of innovation in crypto
(23:44) Re-setting global capital markets
(24:14) “Pattern match” for TradFi players coming into crypto
(25:35) Why OTC?
(26:42) Non-existent best execution in crypto
(28:05) Standardization in trade settlement
(29:07) Waiting on Trade Cost Analysis
(30:14) TCA and transparency through regulation
(31:15) Adapting and implementing regulation in the light of technology
(32:30) Keyrock’s preparation for regulation developments
(34:48) Different plans for different scenarios
(35:25) The global (and regional) implications of crypto regulation
(37:42) Implications of MiCA for liquidity in crypto markets
(39:06) Paths to the reconvergence of liquidity and better capital efficiency
(40:04) Scary MiCA?
(41:18) Leading crypto countries in Europe
(42:00) Why Switzerland for Keyrock?
(43:11) Keyrock’s HFT ambitions
(45:03) The dominance of engineering
(45:18) Pushing the pedal on acceleration (and regulation)
(46:35) The last question
Listen and watch:
Follow on social media:
Episode transcript:
Kevin de Patoul:
So you have on the one hand, liquidity as one of the main added value of tokenizing assets.
At the same time, the actual liquidity on tokenized market is very fragmented because of the very nature of these markets and the tech that underpins it.
So putting it together, we launched Keyrock with the idea of building a system that would allow us to provide liquidity to all digital assets, knowing that for us, our view is that all assets will eventually be digital.
Full episode:
Ian Simpson:
Hello and welcome to another episode of RULEMATCH Spot On, the only podcast focused exclusively on the institutional crypto and digital assets industry.
I’m your host, Ian Simpson, and if you want to know what banks, securities firms, trading firms, hedge funds, and others are doing in crypto and how they’re doing it, this is the place for you.
My guest today is Kevin de Patoul, CEO and co -founder of Keyrock, a leading global liquidity provider, market maker, algorithmic and OTC trading firm founded seven years ago and he is our guest today in the studio in Zurich.
Kevin, welcome.
Kevin:
Thank you, Ian.
Ian:
Good. So today we’re going to be talking about liquidity in crypto markets, all about liquidity.
It’s going to be really interesting to get your take on some things across different areas of the market, whether it’s high frequency trading, whether it’s market depth, OTC trading, settlements – some of those things that are a little bit down in the weeds.
But maybe just to start with, what would you say is the current state of liquidity in the market?
Kevin:
Well, I think that thanks to our good work, it is getting better and better.
I mean, very clearly, there’s still a lot of work to do.
We are seeing in general, liquidity that is improving, of course, on the main assets, but also to some extent on the smaller asset, thanks to a lot of DeFi innovation that basically are very good to create that initial liquidity on assets that are earlier in their life cycle, I would say.
So I think that in general, we’re seeing clear improvement. However, it’s still in general, you look at digital assets in general, it’s still quite far from what traditional markets are, except for the most liquid pairs.
I think there’s also a tendency to underestimate how an asset like Bitcoin, how liquid it actually is, right?
In terms of spread, we’re talking sometimes it’s quoting less than one Bp for pretty good size.
So I think that on the bigger assets clearly there is strong improvement in liquidity.
There was two years ago, following the FTX, kind of a big dip. Also following the Alameda collapse, there was quite a big dip there with widening spread.
This is something that has been tightening and getting better very clearly.
So I think we’re in a good place, but there’s still some work to do.
Ian:
When we talk about liquidity, you mentioned DeFi, then – so like where is the liquidity, geographically, but also venue types…
You see that from a high-level perspective, I’m sure. I mean, there’s still…
At Keyrock, we trade centralized, we trade decentralized, we trade on spot, we trade on derivatives.
I mean, clearly the bulk of the liquidity still is in centralized exchange, maybe on perps.
Clearly, if you look at what is centralized versus decentralized, it’s like one to 10 more or less in terms of ratio.
So clearly, it’s still there.
However, that is quite different, of course, when we talk about the long tail, because it’s very, very easy to launch a pool on the DEX.
It’s not that easy to get listed on the centralized exchange. So you have a bit of a different focus on extent and different “value add” of both types of venue.
When you look at geographies, I mean, there’s a lot less in Europe than you would have in the US or Asia.
We still see that clearly for us, the pricing is happening in Asia, very honestly, and the rest is a bit more following.
If you look at most of the larger exchanges, there is a very strong concentration in Asia very clearly.
So if you look at the split between centralized, decentralized types of instruments between spot and perhaps mainly, options are still very, very, very small.
And I do think it’s a very big lever of growth in the future. I think there’s going to be a lot of growth there, but currently it remains very small compared to the rest. Then geographically, say Asia would be a bit more…
Ian:
So liquidity is your thing, right? At Keyrock, that’s what you focus on entirely. When we talk about “what you do and how you do it.”
Just give us kind of the high level of the different pillars of what you’re doing. Maybe how you started seven years ago, right – and then how that’s developed.
I mean, I can start with the beginning. So I founded a company with two co -founders in end of 2017. I started to be interested in digital assets and Bitcoin in 2014, 2015, more and more.
Basically, then, ICOs started and the main question for us was “Why are these so popular?”
Because ICOs back in the days is kind of a glorified Kickstarter campaign, right?
But the size of ICOs versus crowdfunding, was a very big, an order of magnitude of difference.
So the question was why?
And what we saw – our hypothesis back then is, okay, if you’re basically digitizing a crowdfunding coupon, and this makes it a more interesting asset because you have something that is potentially a lot more liquid.
Because you have something that is a lot easier to send around to trade.
So you have something, a lot of potential liquidity that comes with tokenizing assets.
At the same time, the entire market was and still is based on a decentralized technology, sometimes not decentralized enough, but that’s another debate.
But in general, decentralized technology, which means that you have quite low barriers to entry. have a lot of innovation because you have composability, of course, of those innovations as well.
You have liquidity that is extremely fragmented and it is really putting those two facts together that led us to create Keyrock.
So you have on the one hand, liquidity as one of the main added value of tokenizing assets.
At the same time, the actual liquidity on tokenized markets is very fragmented because of the very nature of these markets and the tech that underpins it.
So putting it together, we launched Keyrock with the idea of building a system that would allow us to provide liquidity to all digital assets, knowing that for us, our view is that all assets will eventually be digital.
When we look at crypto today, what it is – it’s a proof of concept.
It’s okay.
This is kind of the cutting edge showing what we can do when we represent value in a fully digital way.
Whether the value being represented actually has value, that’s another debate.
Many things are digitized and in my view, we don’t have a lot of intrinsic value, but still it makes sense and it shows a proof of concept of what can happen when you digitize value.
So eventually we believe that this will encompass all assets and that’s kind of where we got started.
So building a system that allows us to provide liquidity to all digital assets.
And that’s nice, you know, as an end goal.
The question is, you know, where do you begin?
And we’ve decided at the beginning, we start as a market maker. So really making markets, not as a prop shop.
Keyrock, the core of our DNA, is not to be just a prop shop.
It’s really as a service provider.
So we start as a market maker, working with token issuers, working with exchanges as well, to be a dedicated market maker, to be there providing service level agreements, providing a lot of transparency, showing them that indeed we are providing the service that we are selling you and really acting as a service provider.
And that is something that I always emphasize, because the core of what we do is to building a client franchise, building long term relationships and collaboration with our clients and not just a prop shop that does a bit of service on the side to source cheap capital.
That’s simply not who we are.
So we really started with market making as a service.
Initially, this allowed us to widen their trading horizon, both in terms of the assets that we’re trading, but also our connectivity to centralized exchange, decentralized exchange, spot perhaps, derivatives eventually as well, and be sure that we cover a big chunk of the market and focus on market making as a service only for the first, I think, four, four and a half years of the business.
We got to a point where we’re very satisfied with our pricing or execution capabilities.
And so, let’s make sure that others can benefit from the pricing as well.
And so we started more on OTC activities on the spot, but also on the option side with the option being our option desk.
We launched it in January this year.
So that came a bit later, but that’s basically where we started and how we’ve been evolving over the last six, almost seven years now.
Ian:
So really coming from the crypto side and now it’s bigger and the services are broadening out. When we focus just on the market making side, there’s some, and I’ll mention the name, Flow Traders, which has been big in traditional assets and then got into crypto as well.
I asked them the question how their strategies maybe mirror or don’t mirror what they do in TradFi.
Do you feel like you are getting closer to TradFi with your market making strategies as things become more liquid and more popular, or how is that developing?
Kevin:
It’s tough for me to answer because I never traded in TradFi.
Of course, we have lots of people in the company that come from traditional finance.
But so there are some things that are getting closer in terms of liquidity. There are some things that remain very different when you look at the fragmentation of the market, when you look at the technical immaturity also of part of the market.
You need to build into your pricing a lot more resiliency, a lot more redundancy than you would ever need in traditional finance.
So for something, there is some convergence on some of the topic, but I do think that inherently the markets are very different.
The way you trade, the capital efficiency that comes with speed of transfer, but the capital inefficiency that comes with the lack of credit lines many times across the industry, the fragmentation of the pricing, the fragmentation of the liquidity, the technical immaturity, all of this means that fundamentally there are still some very different ways of trading, of pricing and executing.
Even though in general, as the market grow, there start to be more and more similarities, mainly I guess with the Forex market, there some similarities there, but I do think they remain like the technical differences in the assets mean that you end up trading in a very different way.
Ian:
Just on the technical side and not on the technical sides of the assets themselves, but how you serve as the market maker.
Centralized exchanges we know in crypto came out of the retail space, not necessarily for institutions.
So connectivity and some of those “down in the weeds” technical things had to be developed over time. How have you built out your technical capabilities and what you do to serve clients?
Kevin:
A painful journey. As I say, we’ve integrated more than 90 exchanges, nine zero, so no standards.
There are starting to be some standards more and more kind of FIX connectivity in the industry as well.
I mean, it’s been tough and that’s where I think it’s not the same thing as building one very good connection to one pricing venue in TradFi.
It is different because there’s a geographical difference on where all those exchanges are. There’s a difference in speed between each of them, even though they will be trading the same assets, potentially giving very different prices for those assets.
There are differences in the tech, how often the tech fails, because it does happen – something that you would never expect in a million year to happen on a TradFi exchange – happens in crypto.
And all of this has to be built into it, that the resilience that I was mentioning in our systems and also in the way that you price, you need to take into account a certain buffer and certain expectation of failures.
And that’s been a lot of investment that’s been sometimes frustrating, but at the end I do believe it creates some kind of a mode as well because being able to do that now is potentially a lot harder than was when we started six years ago.
So yeah, it does create some challenges, but that’s why there are opportunities as well.
Probably the barriers for entry to market making in crypto and then the next level of digital assets is much higher today than it was
Kevin:
I would think so, definitely.
Ian:
When we talk about technical connections and those things, standards aren’t quite there yet.
Do you work with others to kind of get to those standards or what do…?
Kevin:
I mean, we work with every single one of our counterparties telling them what the benchmark of quality is in our eyes and what is of the entire horizon that we trade, what we see as the best, what constitutes the best, what our needs are, and hopefully, you know, as somewhat valuable customers, we are able to push that in the right direction.
We are working with them, but in the end, of course, we’re not the marketplace.
We work with marketplaces, but it’s in their hands to make it as best as it can be.
And we’re trying to influence that as much as possible by using the width of our horizon as a learning opportunity and we’re showing this is the best that we see.
“Please, can you do the same? Because that’s what is eventually going to attract more volume to your venue and make sure that we continue to trade here is because you get to a certain level of quality.”
Ian:
So give and take.
You telling them a little bit what you would like them to do and them telling you what they can do.
Kevin:
Exactly.
Ian:
That grows. You’ve grown to, is it 180 employees now?
Kevin:
A bit less than that, yeah, almost.
Ian:
So a lot of those technical people to build it out.
Kevin:
That’s more than half the company.
Ian:
Okay. Let’s just dive down into trading itself and from a high level.
Well, first of all, some people say maybe coming from TradFi, crypto isn’t liquid, you know, it’s and you mentioned the fragmented liquidity.
So that’s one challenge. But now let’s talk about the biggest trading firms in the world coming into the space and starting to do business.
If they come with these really large orders and they hit the market crypto being as big and global as it is.
How does that filter through the market, from the market makers that get hit across different venues, then maybe through brokers or smart order routers where the trades are split up to then to the hedging?
What is the ripple effect or the radius of something like that?
Is that still a challenge?
Kevin:
A challenge. It depends on what size, right?
Of course, the bigger it gets, more first the more counterparties will need to be involved.
If you look at very big, very good examples, recently all the ETFs, right?
And how much they’ve grown since the launch, the impact they had on price, if the market was super illiquid with such a big buying pressure, you would have expected everything went 10x, not the case, right?
So there is some liquidity there clearly.
If not, you know, this buying pressure on ETFs, it doesn’t just be dumped on books on central limit, all the books, right?
It does go through liquidity providers initially, and that’s where there is a lot of volume there.
But then, of course, these liquidity providers – and Keyrock amongst them – we’re going to be deciding whether we “warehouse the risk” for a certain amount of time or not.
Or whether that risk can be offset by other flow that we have coming from other clients and then partially be hedged as well on exchanges down the line. there is kind of that ripple effect.
When I look at the liquidity now, I think that the ETFs are a good use case to see that there is still some quite deep liquidity to be able to withstand these unilateral pressures we’ve seen since January in general.
And so yeah, you have kind of that split between first OTC and then eventually with some cris-crossing of flows and then eventually going forward to the exchanges themselves.
Ian:
Was Keyrock itself involved in the ETFs and in market making?
Kevin:
We are.
Ian:
And are you at liberty to say more about that?
Kevin:
No.
Ian:
Maybe can you say more about how you prepared for that or just what were some of the considerations when it was clear that this was going to come? Was there anything special that you
Kevin:
Of course. There isn’t kind of one specific preparation.
It’s more kind of…it’s a journey, right?
To make sure that you’re a list of things of things that you need to do and do well.
But even before the ETFs were a possibility, it was about okay.
You need to be in the game, right? So are you able to? Quote a type price. Are you able to facilitate trades at size and are you able to do both, you know, all of the above while maintaining full regulatory compliance and making sure that you do things well too.
Basically, that’s something that takes years and that is a continuous effort rather than how the ETFs are going to be in five months.
Let’s scramble to be able to do it, right?
It’s really kind of just a continuity of our strategy from since the beginning. So building the reputation, building the tools over time to be in that position.
Ian:
Just on the topic of ETFs, I think there was some research from Kaiko recently about about the weekday versus weekend liquidity.
Can you say something about that?
Is that a trend that you’ve noticed and something that you have to take into consideration now that the ETFs are there?
Kevin:
I mean, it’s not only ETFs. We’ve always seen that there’s less liquidity on the weekend.
It’s not something…
I haven’t seen the research by Kaiko and maybe it shows that this is even strengthened, that trend, right?
But that was the case before ETFs as well, would see always like more volatility on weekends because you have less liquidity.
I mean, much as like crypto in and of itself is 24/7, yes, but there are some very clear ties to the traditional world as well.
There is some ties to fiat as well, which is closed on the weekend and some people love to trade 24/7, others like to do something else.
So we’ve always seen less liquidity and more volatility during the weekends.
I would imagine of course the ETFs is kind of a traditional wrapper around Bitcoin in the case of the Bitcoin ETFs.
So I would imagine it just strengthened those trends because it just brings it closer to how the traditional market works.
To some extent, this might be a bit of a step backwards. I do think that ETFs are great for “a go-to-market,” but as a product, they make no sense.
Like an ETF from Bitcoin, I think it makes no sense at all as an instrument.
But as a distribution, it’s great.
Bringing it to mainstream, it’s great.
So for all of that, I think it’s a net positive.
But yeah, in terms of certain liquidity habits and weekdays versus weekends, it does bring it closer to how traditional finance works.
And then tied to fiat itself, whereas in crypto, we also have large volumes of crypto versus stablecoins.
Ian:
Exactly.
Kevin:
But I mean, still this provides the… Like all the stablecoins provide an additional buffer to separate crypto from fiat, but at end of the day, it is fiat backed, right?
So you still have that link at some point.
So when something happens there on the weekend, it’s more problematic than in the week.
I mean, Silicon Valley Bank, like that makes…there’s still that tie to the traditional system that does work five days a week.
Ian:
When we talk, you mentioned the OTC market and also your OTC desk that you’ve launched and now market models again with crypto starting with retail, a central limit order book type, centralized exchanges and you have DEXs then there’s OTC.
What do you think is kind of the state of play in different market models right now and where do you think it potentially goes in the next…medium term say?
Kevin:
I mean I still believe you know that central limit order books are a very efficient system.
And what is interesting is that there is the problem for some of…centralization.
It’s like, how can we go around centralization?
And so that’s where we start to have more and more of, four years ago, those AMMs, right?
So here we add decentralization, but then the problem is that to do that, given the technical capabilities four years ago, we need to not do just a central limit order book and go with these pools.
But then if you look at the subsequent kind of upgrades, getting closer and closer.
Like the more ranges you add to those pools, the closer you get to an actual central limit order book eventually, right?
So in terms of price discovery mechanism, I think a central limit order book works very, very well, honestly.
And then yes, you can, you may want to add some decentralized component to it for different reasons and purposes, some of which it makes sense, some others it doesn’t.
I do think that it’s a very efficient price discovery mechanism.
One thing that we follow very closely on the market, especially on centralized, on CeFi it’s quite straightforward, right?
But on DeFi, I think that everything around intent – a kind of, you know, kind of on-chain RFQ system is something that I think is very interesting.
And to some extent brings a lot of DeFi closer to what you would see in traditional market, but just with an additional layer of decentralization, which is good.
You get certainty and potential transparency around execution and how the trades are made, but also making it more accessible to a wider number, which is also a big chunk of the purpose of decentralizing finance in general.
So like intent markets is something that on DeFi, we follow very closely and I personally think has a lot of momentum.
Ian:
And you’re building to integrate and work with that also at Keyrock.
At the forefront.
Kevin:
Trying to be, yeah.
I think this point is a very big differentiator between digital finance and traditional finance.
The speed of innovation is absolutely ridiculous because if you have a market that is, not everything is open source, but you have a market that is decentralized, you have a lot of composability, everybody’s building on top of one another everywhere in the world, the speed at which things move is just absolutely ridiculous.
And so for us, like we’re a crypto native firm.
But still, it takes a very conscious effort and the actual allocation of resources, dedicated resources to make sure that we continue to be at the edge and we continue to follow because the speed of innovation is absolutely crazy.
And I do think that for trading firms coming from the equity market, that would be quite a shock to see how fast things move and change and now there’s a new financial primitive that emerges there and then all of a sudden there’s like hundreds of millions going there and then now it’s somewhere else.
Like this, the speed at which that goes is…
Ian:
It’s a little bit confusing!
Kevin:
A little bit.
Can be…
Ian:
Makes your head spin, I can imagine.
Kevin:
But I think, you know, I think that comes with something new.
If you, at the end as an industry, we’re trying to somewhat rebuild market infrastructure from scratch in a different paradigm…
Like hopefully, that’s kind of the goal. When you do that, for sure there’s going to be…
You know, you cannot go in a straight line to the goal, right?
There’s going to be some back and forth, left, right?
But that means a lot of new things.
And if you have that in a way that is decentralized, the speed at which it goes is really impressive.
Ian:
When we talk about institutions particularly, and that’s also a little bit the focus of the podcast and for us, thinking about operating, like you say, in those markets that are so new and changing all the time, do you think they come in and look for things they’re used to?
Like the central limit order book, they would come and look for that or maybe an RFQ model or OTC, where you can be sure of your counterparties.
That’s also something that’s big for institutions.
What do you see being more advantageous for those kinds of participants?
I mean, I think they definitely look for what looks familiar.
Kevin:
I mean, why do we have an ETF?
Ian:
Fair point.
Kevin:
It’s just because it’s familiar. It’s the same thing and it can be distributed in the same channel.
Like nobody, especially not for an economic purpose, you don’t look for change for the sake of change.
Right, it’s just like you, I guess as an entity, as an organization, you accept to go through change because the added value that it brings is so high that I’m going to take all the hassle of changing things.
But in general, if you can have that added value with something that looks and feel like something you’ve done 100 times before, you’re going to do that just because it’s a lot easier.
It’s lot easier to explain, it’s lot easier to understand the risks.
For sure, they’re going to look for things that look familiar.
Of course, what we need to strive to do is to bring so much added value with change that change becomes palatable and becomes unavoidable.
And that’s how we move forward.
But they would always look for things that look what they know.
Ian:
And on the OTC side, do you see institutions go in that route for the certainty of execution, of counterparty risk?
Kevin:
I think that plays a big role.
So if you trade with Keyrock, you have the liquidity of our entire system.
You have the pricing of our entire system. You go on one venue, you have the liquidity of that venue.
I mean, of course, just that already is like, okay, there’s a very broad scope.
So that’s definitely something that makes sense. Also you have a certainty of who you’re trading with, what they do, what the track record is, what is their legal status, their regulatory status, how compliant are they, what is the check that they put on their customers and so on and on and their counterparties.
So I think all of this is one of the reasons why OTC has gained momentum and even more so after FTX in 2022.
It has been like a counterparty certainty is something that became much more of a theme.
Credit risk is something that became a lot more of theme and so that continues to be the case, especially for institutions.
Ian:
Now I’m going to throw in a word that maybe some people don’t like or maybe some people pretend to know and don’t know.
Depending on where they come from, there’s this concept of “best execution,” which I imagine is also important for institutions.
First of all, how would you define that in the crypto sense?
Kevin:
Doesn’t exist. Doesn’t exist. Flat out.
Yeah. It doesn’t exist.
First of all, there’s no regulatory framework around it today.
Second, like the market is so fragmented that even if there was one, I don’t see how it could be enforced to be very honest.
So it just doesn’t exist.
This is just, it’s a game of trust now.
And to some extent, that’s where, you know, reputation and brand in OTC has an impact is that, your counterparties are going to trust and the more transparent and the more you can prove it, the better they’re going to trust that you’re giving them the best possible price with, you know, margin on top.
Depending on what business model you’re in. But today in crypto, there’s nothing that is…
It’s always “principle to principle.” There is no agency business in crypto.
And part of the reason for that is that best execution is extremely hard, close to impossible to guarantee, right?
So it remains in the big, trustless world that digital asset would like to create.
On that front, it remains very much of trust-based game.
Ian:
Yeah. I’m just going back on the OTC side.
When it comes to settlement – there’s probably still a lack of standardization on that.
How do you get set up for settlement on OTC trades?
Kevin:
What do mean by how do we get set up?
Ian:
I mean, how do your counterparty or how do the people want to be settled?
Kevin:
Very fast. Very fast.
So no up-front pre-funding, but very fast post.
It’s quite common for us with the OTC counterparty to settle in less than an hour.
It’s very, very fast. Has to be..
Not instantaneous, atomic, blockchain, but for something that I know, for OTC trading, so it’s not going to be just atomic swap, but selling in half an hour is quite a norm,
And in good size as well.
Ian:
One other term that came up in a conversation actually with Hidden Road a while back, “transaction or trade cost analysis.”
Is that still something that’s not out there being talked about or needed yet?
Is it talked about enough?
Kevin:
Probably not. There’s still a level of maturity that is gained on all the counterparties are active in the market.
Should it be talked about more? Yes.
As relevant as on other markets, given the volatility of this one, right?
So there is a question there.
But in general, I would think that again, for us, as I say, we build very strong client relationship.
The strength of Keyrock is the client relationship.
So for us, providing full transparency of the execution that we provide and the costs that are associated with it is something that is part of a good service.
And so I do think that in general, the industry is going towards better and better service and fairer and fairer trading.
Should it be talked about more? Definitely.
We’ll always be in support of it.
Ian:
Do you think it will eventually get into regulation at some point?
It’s tough. I think it’s interesting when you think about the regulatory frameworks.
They have been built over the last decades to basically address the shortcomings of technology.
Because the less technology you had in transacting, the more there was a need for people, for trust.
You cannot just trust, right?
So we’re going to put rules, verification.
And so all of this has been built to address certain shortcomings of the technology we didn’t have 100 years ago, we didn’t have 40 years ago.
And that changed year over year over year, right?
And now all of a sudden, we have technology that allows us to do a lot more.
And so potentially requires less pure regulatory controls because some of those controls should be embedded in the product or the service that is provided.
But so the question is how do we go about it? Do we simply try to adapt an existing framework at the margin.
So have marginal changes to an existing framework for something that is meant to be radically different?
Or do we start to rethink as, okay, wait, we have this regulatory framework, what is the purpose of that?
The purpose of that is to ensure protection of consumers, of investors.
Great.
How do we reach the same goal, potentially with a different framework, given these new technological capabilities?
And so for this, it is a question like, how are we going to go about this?
Should it be something that is a purely externally imposed regulatory framework?
Or should it be the markets pushing towards technological solution that allow you to have the same certainty without the need for that external control.
And I do think that the right answer is somewhere in the middle, right?
But I think that simply marginally adapting a legacy framework is not going to work.
I think that believing, let’s just trust the market, that’s not going to work either. So there needs to be something that is in between.
Ian:
You know, as this develops, and of course we know in some places it’s developing more and less, US versus Europe versus other jurisdictions, and people have their opinions about that.
How are you at Keyrock kind of preparing for what is clearly coming in the regulatory sense and what may come in different ways?
Kevin:
It’s very hard. It’s very hard.
But again, I think those types of challenges are what created the opportunities in the first place.
If everything was clear on the tech side, everything was clear on the regulatory side, there wouldn’t be the space to build new things.
But it’s very tough because first it changes constantly.
By the time something is on, it’s outdated.
I mean, look at MiCA. DeFi is not in MiCA.
When you think about it, that’s crazy because we’re talking about first – DeFi summer was four and half years ago.
MiCA is going to be live in January 25, right?
Not there. No mention of it whatsoever.
And then, so of course, it’s going to change.
I’m just looking at Europe, right, because it’s where we are.
But then you look at somewhere else, it’s different. It’s constantly changing. You look at jurisdiction that were forward-looking – all of a sudden, you know, take a very hard stance.
The US for the last two or three years has been absolutely ridiculous.
Now, OpenSea is getting sued as well. I mean, the things are changing so fast.
This is a very big challenge because you don’t have certainty of business. You don’t have certainty of business in terms of where can you do what, but it also has an impact on who can you do it with because it’s not being discussed a lot, but the challenges around having banking and financing partners for crypto companies is very, very tough.
Because all of a sudden you have something that changes on the regulatory side and nobody wants to touch crypto anymore.
So is a very big part of our operational changes as a firm.
Basically what we do now is that we have plan A, plan B, plan C, plan D.
And that means time, that means cost, right?
And it’s, by the way, we said that the barriers to entry now would be a lot higher than six years ago.
This is big chunk of it because if you want to have the right setup in place, you know, with multiple options.
That’s going to cost money every single time and you need to be able to afford it and to do it.
So it is, this operational burden is part of the barrier to entry, which of course we can only hope for.
You know, more clarity, more stability, but it’s not there yet.
So the only way we can prepare is that you prepare for everything.
We have yet to have multiple plans and when we consider a bad scenario is not whether it happens, it’s when it happens.
And just to make sure that we prepare for it.
When it does happen, it’s fine because we have redundancy and that’s really how we look at it.
Ian:
You mentioned MiCA, so let’s go down that rabbit hole just a little bit. Maybe first of all,
This is for the European Union. Then the US is in its state as it is.
We have Switzerland, which we’re happy to talk about as well.
But you see these different regional things developing as a company that’s globally active. Do you see that that might break things up or also provide opportunities within a region?
Will liquidity centralize in Europe in the United States and in Asia?
Or will it still continue to be global, but global players like Keyrock will need to really adapt and expand?
I mean, that’s a strategic choice, right?
You want to be a global player with the costs and challenges that come with it, or do you want to be a fully focused local player with therefore a bigger with more of a limitation on the scale that you can get at.
That’s a choice and each company will need to decide.
And we see, for example, on the exchanges side, you have different strategies. Some are, you know, we only do one geography, but we do that super well.
Others say, we want to be global. You can have both.
In general, I think that something like MiCA, it’s incomplete, right?
But in general, I think it’s good, right?
There are some shortcomings and lots of discussion around, you know, stablecoins.
What are the requirements? There are the two tough, not tough enough, like…mainly too tough generally is the consensus.
So there is clearly something that can be done better, but at least it gives something.
It’s okay for Europe, you have something that is clear that will need to be iterated on and we need to deal with the shortcomings in the short term, but at least it gives something that gives stability, that is clarity.
I’m all for having tough rules and make sure, tough rules that make sense and make sure that we abide by them, but they cannot change all the time and be different when you work 100 meters.
And that’s a bit what creates a challenge.
So I do think that the jurisdictions that will have the more clarity and the more stability will eventually win the most on the global scene, then what companies decide to do, whether to be in one or all, that’s strategic choice for each.
And maybe those jurisdictions that have the clearest regulation, let’s say Europe and Switzerland, then come closer and closer together, providing those bridges between the two.
That’s why I’m in Switzerland.
Ian:
There you go. Exactly.
When it comes to MiCA, I mean, thinking about the exchanges and liquidity in particular, because that’s what we’re talking about, global players who do want to be active in Europe and in other places, will they, for instance, have to split the order books and have a totally different system in different places?
How do you think that will develop?
Kevin:
So I think you need to have a… You need to have some level of fit, right?
Definitely, because if you’re active in one jurisdiction, you need to comply to that specific jurisdiction and therefore the risk taking, the risk decision, the trading decision have to be taken within that framework, which is part of the constraint.
You need to make sure that you can mix that with a certain level of global efficiency as well. But I think that definitely the more scattered the market, the less efficient it is – and the less liquid it is.
It is something that’s why I’m saying that we need to have a certain jurisdiction that have that clarity and that stability and that the bigger that jurisdiction, the better because the more fragmentation you have, less efficiency you have.
I do think that any subdivision and differences in frameworks will lead to fragmentation of liquidity, which eventually is negative for the market.
Ian:
And is there, besides firms like Keyrock, are there other ways that that liquidity might come back together, become more accessible?
Or is it DeFi? Is it something else? Is it prime brokers? What are the options?
Kevin:
I mean, I think there are many different options for different needs, right? I don’t think that there is a single solution. I think that’s, if you look at what are currently the biggest, I guess, constraints in crypto versus in digital assets versus what you have in TradFi is you the capital efficiency.
It’s even worse in DeFi, right?
That is…it’s very very bad.
So there’s lots of solutions working towards that – so clearly prime brokers, you know in the centralized part of digital asset they can play a very big role.
But that’s not going help the retail participants, right?
So I think that there isn’t one single solution, but we’re going to have you know multiple that you know act as bridges and you know our purpose as a market maker is to be part of that solution and provide liquidity wherever we see demand on the market.
Ian:
Is there anything else about MiCA and I just throw this out you can answer or you don’t have to answer that scares you in particular?
Or that you think is really bad?
Kevin:
No, I mean again I think it’s incomplete right?
I think that for stablecoins, for example, I think that some of the requirements are so strict that it kind of dilutes the actual added value of stablecoins to make sense because it ties them too closely to some, you know, traditional, the traditional system as well.
So there is…I think there is some stuff that are not perfect, something that is very bad and scares me, not really.
One thing that I’m keen to see is how the actual regulatory arbitrage is going to work as of January before…between the different European jurisdictions, because the question is where, you know, if you’re active in Europe, where are you going to apply?
Which jurisdiction is going to be ready to actually process an application, ask the right and the smart questions and actually be able to oversee activities?
That we’ll see, right?
Because Europe is relatively, I mean, it’s not that big, but there are many different regulators there and how is that going to play out? I wonder.
Does it scare me? Not really, but it is a question mark.
Ian:
Do you have a feeling, and not to put you on the spot, but one or two jurisdictions that are perhaps ahead or…?
Kevin:
I think France is ahead. I think they’ve been very proactive.
Unlike many…
I mean, there are others, right? But I think that France have been very proactive with the Loire Pact already a few years ago. They decided to be ahead of Europe.
They decided to be ahead of AMLD5. They decided to be ahead of MiCA and launch their framework first.
There’s a reason why we see like most of the large foreign players when they come to Europe, they go to France.
I do think that France is ahead. That doesn’t mean that it’s the one and only, right?
But I think clearly they’ve taken a very forward-looking positioning.
Ian:
And you said being here in Switzerland, that’s a good thing. What is it particularly about Switzerland that is attractive for you, for Keyrock?
Kevin:
Well, think it’s…are very clear in Switzerland, right? They might not all be right, but they’re very clear.
We find that the business environment is extremely pragmatic.
If you have something that makes sense, if it’s a bit different than what we’re used to, fair enough, you know, it makes sense.
And you know what we’re used to has to change that it becomes a norm because again, it makes sense.
And so I think that this combination of clarity and pragmatism is something that is extremely, extremely conducive to business and innovation.
So again, not perfect and there are, but I do find as well I think that the dialogue between the regulator and the actual industry is a lot better than what I’ve seen in many other countries as well.
A few months ago this whole discussion around staking, how do we consider there’s been this back and forth things change again.
You have clarity – you have pragmatic and I think that’s a very good combination.
Ian:
Very good point.
Very pragmatic and very open -minded – which we like to hear and we like in many different levels.
One topic that’s not mentioned too much yet in the crypto space is high-frequency trading.
I noticed you have a job ad out for a Head of Engineering for HFT.
What are you preparing for?
What do you see? What do you think is coming up in that area?
Kevin:
I mean, it’s interesting, right? Because we trade high frequency at the level of crypto, right?
Which is not really HFT.
It’s not the same thing as what you have in TradFi, simply because again, it’s not kind of hardware based.
A lot of it is cloud-based – it is the fragmentation of the market, which just makes it a lot slower than you would when you have just one venue and one price feed.
I think it’s just the nature of things to get faster and faster and faster and more efficient.
And this is going to follow.
I think before, I don’t think that the system that is as fragmented and as decentralized as digital assets will ever be as fast as a system that is 100% centralized.
Maybe some engineers much smarter than me would say – or would maybe contradict me, but I don’t think that if you look at the database, I don’t see how a blockchain could be as fast as a centralized database.
It has other strengths, right?
But it’s never going to be as fast.
So it’s the same logic for this.
You have a market that is a lot more fragmented, therefore is slower.
But in its own benchmark, it’s getting faster and faster.
And so this is something that’s going to continue, which I think is in the end positive for the market.
Like the faster, the faster price adapts, right?
It does benefit liquidity and it is something that eventually is beneficial for most market participants.
Ian:
And especially for people who are very good with the engineering, the algorithms and so on, like Keyrock.
That’s been something from the very beginning that you’ve been strong on.
Kevin:
Yes. I think that when we were 15, we had 13 engineers.
You know, it is…and now it still continues to be more than half the company.
So that’s always been a very strong focus.
Ian:
And what else do you think will need to be in place to accelerate things, not just on the speed of trading, but on the speed of doing business in the market?
Kevin:
I mean, that’s a broad question.
Many, many things, right? I continue to think that the biggest bottleneck in the development of this market is regulatory clarity.
Which slows the whole thing down the most.
And the reason why it slows things down the most is because we’re trying to fit a square peg in a round hole. Because we are trying to marginally adapt a model that is decades old to something that is a completely different paradigm.
And I think that’s the biggest mistake, which is what slows the whole thing the most.
You know, we’re approaching Christmas, so on my wish list would be regulatory clarity.
So that we could get to something where, now we have stability, we can really build things that make sense rather than things that you will have to change over time.
Ian:
Exactly. Exactly.
Kevin:
Every month, every… It creates ridiculous inefficiency if you want to be at a large scale.
And it prohibits people that decide to be on a narrower scale to actually grow big.
And so in general, I think it slows down the market a lot.
Ian:
One question we ask everybody before we finish up is just…
Is there something in the market or something at Keyrock that you see coming up in the next maybe six, nine months that nobody is talking about or very few people are talking about that our listeners, our viewers could perhaps look out for?
And maybe we say not MiCA, so something else that could be interesting to think about or consider.
Kevin:
I mean, lots of things are interesting to think about and consider. Is there something that nobody’s talking about…
I don’t have the arrogance of a…
Ian:
…a crystal ball.
Kevin:
Yeah, no, but not even the arrogance to think that I’m that much on the edge of everything on the market – that I’ve seen something that nobody else is talking about.
But I think that everything that is around intent markets and capital efficiency in DeFi is something that I think is extraordinary.
It’s extremely interesting. Yeah, but…
…there were presentations on intent markets two years ago at EthCC, so it’s not like nobody’s talking about it.
But it is slightly gaining more and more momentum, and I think it’s very interesting.
Ian:
Very cool. Very good.
Kevin, thank you very much for joining RULEMATCH Spot On.
Hopefully, we’ll have a chance to talk again sometime in the future when there’s more developments and things to talk about.
Thanks for joining.
Kevin:
Sure. Thank you very much for having me.