Deutsche Börse is building a vertically integrated market infrastructure for institutional investors in digital assets
- Future of Finance
- Sep 10, 2024
- 5 min read
In December 2021 Deutsche Börse completed the acquisition of a majority stake in Crypto Finance, a provider of trading, custody, and investment services for cryptocurrencies headquartered in Switzerland, where it is regulated by the Swiss Financial Market Supervisory Authority (FINMA). The strategy behind the acquisition was to enable Deutsche Börse to offer its institutional clients access to cryptocurrency services - including custody – and, obviously, give Crypto Finance access to the international client base, infrastructure and capital strength of the German securities trading, clearing and settlement group. Just over two years later, in March 2024, the Deutsche Börse Digital Exchange (DBDX) went live. DBDX is a trading venue for native cryptocurrencies and one of several initiatives of Deutsche Börse Group's holistic Digital Strategy. DBDX has now been successfully merged with the Group’s FX entity – 360T - to achieve synergies on the organisational, regulatory as well as go-to-market dimensions. The digital business is headed by Carlo Koelzer, founder and CEO of 360T and Head of FX and Digital Assets of Deutsche Börse Group and will undergo a rebrand. In partnership with Crypto Finance, the vision is to offer a one-stop-shop solution for trading, settlement, institutional custody - all under the umbrella of Deutsche Börse Group. Future of Finance Co-founder Dominic Hobson asked Eric Viohl, Managing Director of Crypto Finance (Deutschland) GmbH and Miryusup Abdullaev, Head of Crypto Spot 360T, how Crypto Finance and DBDX work together.
Hobson: DBDX, like Crypto Finance, provides a spot trading platform for institutional clients in Germany, using a Multilateral Trading Facility (MTF) licence. How important has the relatively advanced German domestic legal and regulatory framework been in driving the decision to establish DBDX, and how does it fit with the evolving European Union (EU) legal and regulatory framework?
Viohl: The regulatory landscape for cryptocurrency in Europe is evolving rapidly, with Germany emerging as a key player. The Federal Financial Supervisory Authority (BaFin) has established a regulatory framework that allows financial institutions to offer cryptocurrency services in a controlled and secure environment. This achievement positions Germany alongside Switzerland.
The E-Securities Act (Gesetz zur Einführung elektronischer Wertpapiere – eWpG) (1), which enables the issuance of financial instruments on public blockchains, is also important. These regulations ensure that the country is well-prepared for the upcoming Markets in Crypto-Assets Regulation (MiCAR), with only minor adjustments needed. This readiness allows regulated entities such as 360T and Crypto Finance to transition swiftly to the MiCAR regime.
Abdullaev: German regulation is currently considered one of the highest standards in the European Union (EU). BaFin’s stringent requirements for clear processes, Anti-Money Laundering (AML) measures, compliance, and information technology (IT) security set a high benchmark for other countries. Deutsche Börse Group, with its strong German foundation, is well-positioned to leverage this regulatory environment to expand its business across Europe under the MiCAR framework, spearheading this growth from Germany.
Hobson: Does DBDX operate like a conventional securities market, with users accessing the market via regulated firms such as brokers and banks during limited trading hours only or can the market be accessed directly 24/7?
Abdullaev: We act as a partner to the market, committed to supporting the ecosystem without directly targeting end-users. Unlike some competitors, we prioritise maintaining the existing relationships between end-users and their banks or brokers. This approach ensures that the client relationships remain intact, as we focus solely on B2B (Business to Business) and B2B2C (Business to Business to Consumer) services, mirroring our strategy in traditional asset classes. Being aware of the growing demand for 24/7 trading, we will not initially offer around-the-clock services. We understand that markets are moving in this direction, and we are prepared to adapt to this demand. However, this transition also depends on traditional market participants, such as banks and intermediaries, extending their trading and operating hours to support longer trading sessions. Not all participants are ready for this change yet.
Viohl: It is worth noting that we already offer 24/7 trading to our clients through Crypto Finance, demonstrating our commitment to meeting the evolving needs of the market while maintaining our core B2B and B2B2C focus.
Hobson: What has convinced you that institutional investors are a better source of liquidity in cryptocurrencies than retail investors, which have tended to be the natural first movers in all types of digital assets?
Viohl: We see significant potential for large banks and traditional, non-crypto-native brokers to offer their clients access to cryptocurrency. There is a substantial group of users who are interested in investing in crypto but prefer to do so through their trusted house bank. By offering these banks a robust and regulated solution, we aim to unlock this new user group, providing them with the confidence to enter the market with a trustworthy partner like Deutsche Börse Group. Our long-standing reputation ensures that we take compliance seriously and provide a stable presence in the market.
Abdullaev: Although we primarily target institutions as our direct clients, we also aim to attract retail liquidity to our markets via intermediaries. The key to developing deep liquidity pools lies in combining both retail and institutional liquidity. This model allows us to create a vibrant and dynamic market environment that benefits all participants and reinforces our role as a reliable and innovative market partner.
Hobson: Which cryptocurrencies will be traded on DBDX and why?
Abdullaev: We started our cryptocurrency offering with Bitcoin and Ether and are committed to further expanding our portfolio in response to client demand, always ensuring full compliance with MiCAR regulations.
Hobson: Trading on the DBDX will take place initially on a Request for Quote (RFQ) basis, to be followed by multilateral trading. How long do you expect the transition to be?
Abdullaev: We initially started with a bilateral RFQ model. However, this model can also accommodate multilateral trading, where liquidity takers interact with multiple liquidity providers. We have observed that market participants are still undecided about which trading mechanisms are best suited for crypto trading. To address this, we have integrated DBDX into our 360T TEX multi-dealer trading platform to offer a wide range of market models and technical inroads. We are now working closely with selected partners to leverage our combined market-building expertise and professionalise crypto trading.
Hobson: How does settlement take place? By delivery versus payment (DvP) with the cash leg delivered via the conventional banking system in fiat currency?
Viohl: Initially, settlements will take place in fiat currency, as many traditional players still prefer this method. However, our technology stack also supports settlement in Stablecoins. At the Deutsche Börse Group level, we are actively engaged in discussions around cash-on-chain and Central Bank Digital Currency (CBDC) initiatives across Europe.
Hobson: Will the DBDX/Crypto Finance combination handle cryptocurrencies only or will the service include payment tokens or Stablecoins?
Viohl: Through Crypto Finance, we already facilitate transactions using Stablecoins and offer trading pairs with Stablecoins as the settlement currency. On the MTF side, we are prepared to support Stablecoin settlements as soon as there is client demand.
Hobson: The 2023 annual report indicates Crypto Finance has under-performed. What explains that and how is it expected to change?
Viohl: Like many in the industry, Crypto Finance Group was affected by the crypto winter. Consequently, this had an impact on Crypto Finance’s 2023 year-end results. Since the beginning of the year, Crypto Finance has benefited from a positive market development. In the current year, 2024, Crypto Finance is performing according to the projections.
(1) For a full explanation of the German legal and regulatory environment, see Future of Finance, Digital Asset Custody Guide, Issue 2, Regulation Matters, pages 31-43.
Integrated Market Infrastructure