The partnership between Deutsche Boerse and Crypto Finance signals a shift towards a regulated environment as investors call for transparency and confidentiality.
Rupertus Rothenhaeuser joined Crypto Finance Group back in January as the firm entered a financing round that has ended with Deutsche Boerse Group taking a majority stake. But the CEO of the firm's brokerage arm, Crypto Broker, has retained its focus on building up the business and the trends driving the growth in the digital space.
Deutsche Boerse has acquired a 66% equity stake in Crypto Finance, a Swiss regulated firm that offers trading, storage, and investment in digital assets to institutional and professional clients.
We want to be fully licensed and regulated as we believe this is the right approach - Rupertus Rothenhaeuser
According to Rothenhaeuser, the exchange paid a low three-digit million figure with media reports suggesting an amount ranging from US$108.6m to US$270m.
Through the acquisition, the German exchange is seeking to expand its digital assets offering by providing a direct entry point for investments including structured products as well as post-trade services such as custody.
The digital asset start-up founded and launched in 2017 by Jan Brzezek (pictured) – a former UBS structured products specialist - was looking for additional funding via a series C round and was engaged with a number of “powerful VC funds, who were looking into our business”.
Deutsche Boerse then came forward as a potential strategic investor.
The new CEO of the Crypto Finance Brokerage who took over from Brzezek in January says: “They were evaluating the digital space as they looked for a suitable partner to deliver solutions for new demand raised by clients.”
As conversations went on, the two firms found more matching points than differences with the Crypto Finance Group being able to match to a large degree the German exchange’s ambition.
“We have now set a period of time between signing and closing which we estimate to be around three months,” says Rothenhaeuser (right).
Licensed & regulated
Crypto Finance is Finma regulated and Deutsche Boerse is Bafin regulated so means both firms will still need to get approvals on their target operating model by their respective regulator.
“We want to be fully licensed and regulated as we believe this is the right approach in a market that needs transparency and confidentiality," says Rothenhaeuser.
As a B2B platform Crypto Finance only deals with institutional clients which feel much more comfortable working with a regulated partner.
“There is still a lot of resistance from investors and banks,” says Rothenhaeuser. “We want to be a market maker for security tokens and for that you need to be a securities broker licence holder, so the licence will help us in many aspects.
“Our advantage is that we sit in the middle and we’re an independent player – we don’t need to go to a bank to offer any of our services. We offer execution, payment, storage, custody, as well as asset management facilities. This is an appealing package for those who can't do it themselves.”
The acquisition will also enable Deutsche Boerse to leverage the firm’s infrastructure to respond to demand from banks looking for storage solutions, or a dedicated trading platform. Under the new set up Crypto Finance will be able to offer cryptos on Deutsche Boerse’s 360TI FX cross rate platform, as well as securitised products listed on Xtra or on the Certificate Borse.
Not every hedge partner makes equally good prices for every coin - Rupertus Rothenhaeuser
“There are a lot of touch points where we simply fit on an exchange as we have the full package in terms of trading, storage, and asset management,” says Rothenhaeuser.
Crypto Finance will remain an independent firm: Deutsche Boerse will take a 66% of the equity stake in the company whereas as the company’s employees and old shareholders will retain the remaining 33% and will also be part of the new executive board.
“The idea is to keep our flexibility and take advantage of having a ‘small fast boat’ on the operational side - trading, brokerage, execution, client onboarding, but benefit from the admin, legal and other functions a big organisation can offer,” says Rothenhaeuser.
The firm is also looking to capitalise on its Crypto Asset Trader (CAT) engine - a crypto asset trading platform that has seen significant growth over the last year because of its flexibility, according to Rothenhaeuser.
Once an investor has passed the onboarding process they have to pre-fund their order by transferring FIAT into Crypto Finance Brokerage bank account, and then they can trade electronically via the CAT system a selection of listed fully electronic tradable coins that include Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Bitcoin Cash (BCH), and Litecoin (LTC) versus CHF, EUR, and USD.
“We have a 24/7 set up with bid/offer spreads. If an order exceeds our bid and offer liquidity, investors can trigger an RFQ and then the system gives them a price for the size of their order,” he says.
“If an investor wants to trade in any crypto asset which is not provided by us on a fully electronic basis, then they can place the order on an agency basis - we will execute it with our hedging partners and give a give the investor an execution, booking and payment instruction on a delivery versus payment (DVP) basis.”
The electronic trading is done by a prefixed API and the matching process of the order into CAT triggers an automatic hedging transaction with the Brokerage’s hedging partners.
“We are not here to bet against our clients trade ideas or take any kind of proprietary risk position. We don't even have risk limits. We simply interact as a facilitator to service the investor and the order flow. Instead of having to onboard into many markets, investors can onboard with us, and we give them access to our hedge partners,” says Rothenhaeuser.
The Crypto Finance Brokerage’s house price is an arithmetic mid-price across multiple hedge providers, their bid/offer spread, their liquidity size, their order book depth.
“As you can imagine not every hedge partner makes equally good prices for every coin so if we need a reference spot for BTC in US dollars, we might use a different weighting on our house price evaluation from a provider that is purely doing BTC in US dollar and has the tightest spread and the biggest liquidity,” says Rothenhaeuser.
The firm also grants its clients from time to time with post trade settlement limits, a settlement credit line it provides to its bigger clients. Finma regulated clients don’t have to pay upfront – “They simply send the order, we put the BTCs into their wallet and then they pay for the transaction”.