Original author: Leo, LeftOfCenter, BlockBeats
On the morning of June 21st, Bitcoin surged, and one of the key reasons was that Wall Street entered Crypto, with the United States launching its own cryptocurrency trading platform, EDX Markets. In the past few weeks, the SEC has frequently taken action to regulate Binance and Coinbase, and the industry has been filled with various FUDs. Many people think that under the SEC’s crackdown, cryptocurrencies will become unsustainable, but is this really the case? It seems that the SEC has other plans.
Just last night, a very “new” cryptocurrency trading platform, EDX Markets, announced its entry, attracting a lot of attention. Compared with previous cryptocurrency trading platforms, this time EDX belongs entirely to the national team of the United States, with the support of Wall Street forces such as Citadel Securities, Fidelity, and Charles Schwab, and as of the time of writing, the platform has provided services to industry giants such as Charles Schwab, Citadel Securities, Fidelity Digital Assets, Blockingradigm, Sequoia Capital, and Virtu Financial. And this cryptocurrency trading platform represents a “compliant” traditional financial entry into the Crypto platform. So how does EDX achieve compliance?
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1. Non-custodial
Unlike mainstream cryptocurrency exchanges, EDX is a non-custodial exchange, which means that it does not directly handle customers’ digital assets, but only provides an exchange platform for institutional users to execute cryptocurrency and fiat currency transactions, with settlement conducted externally.
LumidaWealth CEO Ram Ahluwalia (@ramahluwalia) believes that EDX may hope to develop into a regulated ATS and eventually become a “national securities exchange” (think NASDAQ or the New York Stock Exchange), which is beneficial to the cryptocurrency market. EDX is applying federal securities laws to cryptocurrencies, and by using third-party banks and cryptocurrency custodians for asset custody, EDX minimizes conflicts of interest and prevents asset abuse, as we have seen in issues with FTX, Celsius, and DCG/Genesis, among others.
The so-called non-custodial trading refers to the settlement process. Unlike mainstream cryptocurrency exchanges that “require customers to deposit cryptocurrencies into wallets controlled by the exchange,” EDX plans to have third-party banks and cryptocurrency custodians hold customer assets. The actual asset transactions occur directly between these third-party companies.
During the settlement phase, EDX Markets acts as an agent to calculate the settlement obligations between the parties and notify each member and its authorized custodian which counterparty it has transacted with and for how much. Members will have independent ownership of their own trading data to verify the settlement data calculated by EDX Markets. EDX Markets does not participate in the transfer of fiat currency (cash) or tokens – this is done only through authorized custodians. Similarly, EDX Markets does not participate in the flow of funds. Settlement will be governed by the legal agreements between members and their authorized custodians without recourse to EDX Markets. In the event of a dispute, EDX Markets will recalculate but the resolution of any dispute will be governed by the terms of the agreement between the member and its authorized custodian.
Additionally, EDX plans to launch its own clearing house later this year to simplify the settlement process.
2. Non-Security Tokens and Their Trading Rules
According to information provided on the EDX website, the trading platform currently supports only four types of token trading: spot trading of BTC, ETH, LTC, and BCH. These four assets are not classified as securities by the SEC and for EDX, this conservative set of tradable currencies helps avoid conflicts with the SEC and is part of the EDX compliance framework. In the future, EDX may add more types of crypto tokens as definitions of securities and crypto tokens become clearer. Currently, only institutional trading is supported, and institutions wishing to join the EDX trading list must pass a “membership screening” before they can trade. Retail investors cannot trade on this trading platform.
Regarding trading rules, some of EDX’s rules are different from those of traditional crypto trading platforms. BlockBeats has compiled information from EDX’s website on the trading rules that have been disclosed so far:
-The trading platform is open for trading 365 days a year, around the clock, unless the trading platform notifies otherwise, such as for maintenance, system upgrades, or other reasons, in which case information will be sent in advance to institutional users of the platform;
-The trading platform has the right to stop or suspend trading in any or all tokens on this trading platform to maintain market fairness, protect investor interests, or take other actions, such as canceling all unprocessed and open (unexecuted) order instructions, or restricting instructions to certain types of order instructions (such as limit orders). The trading platform has the right to determine the duration of such “suspension, suspension, closure” behavior and notify institutional members, and the system will reject all orders related to the token suspension of trading.
As for the rules for the launch of new tokens, they differ significantly from traditional encryption platforms, as follows:
- If the trading platform lists a new token category for trading, the trading platform will suspend all orders related to the new token and then start a quotation period for the token. The trading platform will decide the length of the quotation period itself. During the quotation period, members can submit orders to the system, but such orders will not be executed;
- After the quotation period ends, the trading platform will launch a limit order trading period, during which the system only accepts limit orders. The trading platform decides the length of the spot order trading period itself. Token limit orders submitted during the spot order period will be accepted, but ordinary token market orders will be rejected by the system;
- After the limit order period ends, the trading platform will transition to the formal trading period, and the trading platform will open the system for trading, and all orders that meet the conditions will be accepted by the system.
- The system should be available for members with access to the system to input and execute orders. All members screened by EDX Markets can use the system in a fair, transparent, non-discriminatory manner.
It can be seen that compared to other trading platforms, EDX is very cautious and has more processes for token trading, trying to avoid being included in the “non-compliant” queue as much as possible.
3. Does not directly serve retail investors
Coinbase and Binance set a precedent. In order not to fight against supervision, EDX Markets does not directly provide services to individual investors. Instead, EDX will provide order routing services through retail brokers to send buy and sell orders from retail investors to the trading platform.
In short, EDX Markets is a non-custodial trading platform that does not directly handle customers’ digital assets or directly serve individual investors. It will provide API-based trading access instead of traditional front-end user interfaces. At the same time, EDX Markets does not directly hold customer funds, but manages customer funds through third-party banks and professional custody service providers. The transfer of funds does not “pass through” EDX Markets, but is completed only between relevant service providers.
This is similar to the operating mode of the traditional stock market, where investors do not directly enter the New York Stock Exchange or NASDAQ, but submit orders through brokers such as Fidelity and Charles Schwab.
4. Market-making must be third-party
As part of the 13 charges brought against the world’s largest cryptocurrency exchange Binance by the US Securities and Exchange Commission (SEC), one of them is “conflict of interest”, based on the fact that a trading company owned by Binance CEO Zhao Changpeng is engaged in “artificially inflating the trading volume of the platform and manipulating transactions”.
In most traditional financial markets, exchanges typically match buyers and sellers at the most competitive and transparent prices, and market-making is usually operated by independent private firms, so there is no “conflict of interest”.
Although this internal market-making model has been common practice in centralized exchanges, it is clear that this model does not meet the ideal compliance conditions in the eyes of the SEC, which has been one of the charges frequently listed by the SEC in recent accusations against cryptocurrency exchanges.
According to Gary Gensler, chairman of the US Securities and Exchange Commission, “these so-called crypto exchanges that are trying to be exchanges are mixing a lot of functions, and in the traditional financial world, we don’t see the New York Stock Exchange running hedge funds and market-making.” In other words, he does not recognize the current model of cryptocurrency exchanges that integrates trading, market-making, and custody.
According to anonymous insiders cited by the Financial Times, Crypto.com has always had its own market-making team and privately banned employees from disclosing the existence of internal market makers. Coincidentally, shortly after the SEC filed a lawsuit against Binance, Crypto.com closed its institutional trading services aimed at the US.
This new type of compliant trading platform created by EDX Markets seems to separate market making from custody, and it exists only as a pure trading platform. By introducing third-party banks and cryptocurrency custody institutions, EDX maximizes the reduction of conflicts of interest and prevents asset abuse.
It is worth mentioning that two of the consortiums supporting EDX Markets (Citadel and Virtu) are themselves top market makers on Wall Street, so we have reason to speculate that the market-making services of EDX Markets in the future may be provided by Citadel and Virtu.
5. Strong support from traditional financial institutions
Similarly, the supporters behind EDX are traditional financial giants on Wall Street, which is also a point of attention for the platform. The supporters behind the institution include Charles Schwab, Citadel Securities, Fidelity Investments, Sequoia Capital, and Blockinradigm.
EDX Markets has a luxurious founding team, gathering former executives from major financial institutions. EDX Markets founder Jamil Nazarali was the global business development director at Citadel Securities before joining EDX. EDX Markets CTO Tony Acua-Rohter was previously the technical director of ErisX. The chief legal adviser is David Forman, who previously served as chief legal officer of Fidelity Brokerage Services and general legal counsel of Fidelity Digital Assets.
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