This week marked the launch of EDX markets, a new ‘digital assets marketplace (read crypto exchange) backed by the regulated financial services giants Fidelity Digital Assets, Charles Schwab and Citadel Securities. Other investors include the Silicon Valley VC establishment, headed up by Sequoia Capital.
EDX has launched in the USA. That’s particularly significant against a backdrop of an intense campaign being waged against major crypto exchanges by the country’s financial regulators.
Over the past several months, the world’s biggest and best-established cryptocurrency exchanges have either dramatically collapsed in scandal, FTX, or are being sued by U.S. regulators – Binance and Coinbase.
The scale and vigour or regulatory action against cryptocurrencies and businesses in the world’s largest financial market, the USA, this week provoked a BBC headline that asked if the aim was the sector’s all-out annihilation.
Cryptocurrency valuations, while up healthily this year, Bitcoin has gained over 80%, are well down from the highs of over $64,000 achieved in pandemic-fevered 2021. There is still a lack of established use cases for cryptocurrencies beyond speculative trading and deeply-rooted concerns over the potential for criminal actors to exploit the greater anonymity they afford.
After the bursting of the bubble that had blown up crypto valuations across the board and a year of scandals and the collapse of several mainstays of the crypto ecosystem, it seems a curious choice of market conditions to launch a new exchange into. Especially in the USA.
However, EDX CEO Jamil Nazarali, formerly of Citadel, is convinced that the new exchange’s business model differs in vital ways that appeal to regulators. In a post published on the professional networking social media LinkedIn this week to announce the launch, Nazarali commented:
“I am proud to announce that EDX Markets (EDX) has successfully launched our digital asset market and completed an investment round with new equity partners. EDX’s official launch allows our outstanding team to bring to crypto the same values and standards of competition, transparency, fairness and safety that investors in traditional assets expect and enjoy.”
What’s different about the EDX Markets business model and why is does it better protect investors?
The core difference to how EDX operates compared to incumbent exchanges like Binance and Coinbase (FTX’s collapse came as a result of abusing the same model) is the separation of the exchange function and broker dealer function. Other exchanges combine the two functions, opening up potential accusations of conflicts of interest. Or worse, the misuse of funds – something both Binance and Coinbase are being sued for by U.S. regulators (both strongly deny the charges made in the cases brought against them).
EDX, however, sidesteps that opacity by taking the same approach as exchanges like the LSE, NYSE or Nasdaq that support the trade of traditional securities. In the same way trades are executed on these exchanges, EDX account holders will buy and sell digital assets via financial intermediaries.
In an April interview with crypto sector specialist media CoinDesk, Nazarali explained the alignment with the model used for the trade of regulated securities. He explains the approach as one being increasingly demanded by investors in the crypto space:
“What we’re seeing is that increasingly, investors want to trade through their trusted intermediaries and that’s especially true post FTX, which was supposed to be the leader in the digital market. If you can’t trust them, who can you trust?”
“So people are falling back on the firms that have been around for a really long time and that have really stood the test of time and that’s a really important tailwind for us.”
EDX are also treading carefully when it comes to what digital assets the exchange supports. As of now only four cryptocurrencies can be bought and sold over the exchange – bitcoin, Bitcoin Cash, Ethereum and litecoin. That cautious approach is because the exchange doesn’t “want to trade something that’s potentially a security (as defined by regulators)”.
Keeping U.S. regulators onside is clearly top priority with Nazarali asserting “regulators really like that we don’t take that risk.”
EDX and its backers, to which, among others, Miami International Holdings, DV Crypto and GTS were added through a new capital raise that coincided with the launch, are targeting the hole in the market left by regulatory action against Binance and Coinbase. Keeping the SEC and commodities regulators sweet should allow the exchange to operate more effectively in the USA, as well as giving American users confidence.
International expansion will undoubtedly be a priority soon enough. But for now, the freshly swept competitive landscape of U.S. market is the priority. As Nazarali stated in April:
“We were founded really to solve a problem in the marketplace in the U.S.”
Is the future of cryptocurrencies one where digital currencies are regulated?
The crypto sector has shown resilience in its refusal to fade away despite a combination of scams, fraud and the more general Wild West approach to capitalism many of its major players have demonstrated over the years.
The dominant theme over the ongoing “crypto winter”, which set in with the bursting of the pricing bubble in late 2021, has been speculation as to if and how a new, sustainable and mature crypto sector will evolve from the carnage.
There are still significant strongholds of scepticism as to whether a sustainable crypto sector that compliments and is integrated with traditional financial markets and services is possible. That will entail convincing regulators crypto markets and service providers are able to both protect consumers and mainstream financial markets that could be exposed to the reckless pursuit of profit that has often characterised the nascent sector.
Financial services providers in the crypto space, like EDX, will also have to reassure that they have the same kind and level of systems in place to prevent criminal activity and exploitation as mainstream peers.
Even if cryptocurrencies and other digital assets are not themselves regulated, at least not in the short term, the future of the financial services companies providing infrastructure a more mature crypto sector runs on may well be.
The recent regulatory crackdown on the sector in the USA is sending a clear signal that companies that want to work with digital assets will have to operate within similar, or even identical, guardrails to those in place for traditional securities.
That could well give the upper hand to the existing financial establishment. They have experience of and the systems and technology to meet compliance demands set by regulators and better relations with them. They also have the deep pockets required to develop the infrastructure and systems that regulators want to see.
And crucially, as EDX’s Nazarali points out, there is more consumer trust in familiar financial establishment names, especially after the recent spate of crypto sector collapses and scandals.
The financial establishment has its own reputational issues and a history of pursuing profits and personal interest at the expense of customers and wider economy. That tarnished past is one of the key arguments made by crypto advocates.
Unfortunately, until now, the crypto sector hasn’t done a good job of showing it offers a more equitable and safer alternative. Reality hasn’t matched up to anti-financial establishment slogans and the arguments presented by white papers.
The result is that the next stage of the crypto revolution looks increasingly likely to be led by establishment-friendly, and often back, new arrivals like EDX. If the new exchange succeeds in establishing a strong market position in the troubled U.S. digital assets market, it may well establish a trend that will shape the crypto sector’s next phase of evolution.