Raring to go
21 Aug 2019
Koine’s Hugh Hughes and Francesco Roda discuss the set up of their new company and highlight how the market is continuing to embrace settlement services for digital assets
Image: Shutterstock
What opportunities and additional capabilities have the recent acquisition of Recruitable provided?
Hugh Hughes: When you acquire a company, you’re looking at two main aspects: the business they do, and the people. Luckily, there were a number of individuals that we knew at Recruitable, two of whom had worked for me before, and one was previously a client of mine.
That group of people I wanted, along with their know-your-customer business, and great computer system. That’s worked really well for us.
Koine offers institutional custody and settlement services for both fiat and digital assets.
What trends are you seeing in custody and settlement right now?
Hughes: The big shift is from net to gross settlement. If you’re a hedge fund or a big investment bank, you want to be able to use your money. The minute you’ve made a decision, you want to use your capital straight away.
At the moment, it’s taking two, sometimes three days before you can, which is a significant period of time. What we’re building is the ability that, once you’ve told us you’ve done a deal, instantaneously you can use your money again.
That’s far more efficient, and you can do it 100 times a day. At Koine, we can do one million transactions a second, which is so important for institutions engaged in high-frequency trading or simply concerned with efficient capital utilisation. It’s a huge leap, and it’s a very exciting change that’s happening in the marketplace. A lot of people will tell you that they provide custody services but keep everything in a physical safe. Our service is a sophisticated custody and real-time settlement solution—not just a little box in a corner.
Francesco Roda: We are seeing the market actually embrace settlement services for digital assets. If you look back at 2018, cryptocurrencies were effectively elevated to the status of a new asset class, which is not correlated with traditional asset classes, a unique trait very interesting for investors.
Some 85 percent of 150 endowment funds in the US surveyed by Bloomberg committed capital to cryptocurrencies_this is just the tip of the iceberg.
The truth is that securities can be digitalised through these new technologies and business practices. This is how I would define blockchain—a great innovation combining technology and cryptography to redefine issuance and distribution of value.
We see this as a trend that will gain traction and continue to become dominant in future years. Société Générale issued a €100 million bond on the public blockchain a few months ago—that proves there is a commitment to this new technology.
The traditional players are starting to adopt this trend as well, in terms of custodian and settlement services. We think that digitalisation will grow fast to cover securities. Blockchain could be the ideal solution to issuing securities to broaden distribution and increase liquidity.
Koine’s solution has been designed to overcome the risk of client assets being hacked from exchanges and minimise any insolvency risks. How does it do this?
Roda: We are driven by the requirements of our buy-side clients. Their key issue today is counterparty risk, which slows the adoption of these new assets. Most of the digital assets and currencies that exist today are traded on non-traditional “exchanges” that effectively play a plethora of roles but, ironically, not that of a real exchange. They are in effect brokers, custodians, settlement agents, lenders; all in a single vertical integrated entity. This is not acceptable for institutional investors—and a practice that regulators are pushing to change.
We are introducing services that are fit for the institutional investment space, by enforcing a robust segregation of duties and governance process, as well as security in the form of both legal and technical protection as demanded by the Regulator.
This gives institutional investors the confidence they require to enter into this market.
Existing vertical integration also impairs the ability of investors to deploy their cash efficiently to multiple venues; to ensure timely settlement, you must maintain a cash balance at each venue, making the cost of funds unbearable.
Koine ensures interoperability across trading venues, allowing us to centralise liquidity management and deploy capital instantaneously where needed. Clients on the buy-side favour this because they have security of settlement with full protection of their cash at all times, as well as access to a multitude of trading venues.
Throughout 2019, Koine’s offering will be enhanced to support securities and initial coin offering. What are your plans for 2020 and beyond?
Roda: Our priorities are set by our clients: institutional fund managers prioritise over-the-counter venues, which they can rely upon to trade large quantities efficiently. Crypto “exchanges” are less of a priority to them, due to the potential for price manipulation.
Crypto assets are unregulated in most jurisdictions while intermediaries may not operate under the same market discipline that regulators would expect from traditional venues. It is a likely occurrence for the depth of book to disappear when orders are placed.
We target exchanges as they continue to evolve and realise that custody and settlement services are not core to their business model—and in fact, may impair it.
This trend is actually happening as we speak; most of the large exchanges are creating independent entities to provide custody services. Institutions welcome this; however, they require truly independent custodians and interoperable settlement services to reach a broader trading community.
Hughes: At Koine, we’ve got a great team and we’re just about to go live. In September, we are planning to raise money for a big expansion, as we’ve taken on advisors to expand into America, the Middle East and the Far East.
Hugh Hughes: When you acquire a company, you’re looking at two main aspects: the business they do, and the people. Luckily, there were a number of individuals that we knew at Recruitable, two of whom had worked for me before, and one was previously a client of mine.
That group of people I wanted, along with their know-your-customer business, and great computer system. That’s worked really well for us.
Koine offers institutional custody and settlement services for both fiat and digital assets.
What trends are you seeing in custody and settlement right now?
Hughes: The big shift is from net to gross settlement. If you’re a hedge fund or a big investment bank, you want to be able to use your money. The minute you’ve made a decision, you want to use your capital straight away.
At the moment, it’s taking two, sometimes three days before you can, which is a significant period of time. What we’re building is the ability that, once you’ve told us you’ve done a deal, instantaneously you can use your money again.
That’s far more efficient, and you can do it 100 times a day. At Koine, we can do one million transactions a second, which is so important for institutions engaged in high-frequency trading or simply concerned with efficient capital utilisation. It’s a huge leap, and it’s a very exciting change that’s happening in the marketplace. A lot of people will tell you that they provide custody services but keep everything in a physical safe. Our service is a sophisticated custody and real-time settlement solution—not just a little box in a corner.
Francesco Roda: We are seeing the market actually embrace settlement services for digital assets. If you look back at 2018, cryptocurrencies were effectively elevated to the status of a new asset class, which is not correlated with traditional asset classes, a unique trait very interesting for investors.
Some 85 percent of 150 endowment funds in the US surveyed by Bloomberg committed capital to cryptocurrencies_this is just the tip of the iceberg.
The truth is that securities can be digitalised through these new technologies and business practices. This is how I would define blockchain—a great innovation combining technology and cryptography to redefine issuance and distribution of value.
We see this as a trend that will gain traction and continue to become dominant in future years. Société Générale issued a €100 million bond on the public blockchain a few months ago—that proves there is a commitment to this new technology.
The traditional players are starting to adopt this trend as well, in terms of custodian and settlement services. We think that digitalisation will grow fast to cover securities. Blockchain could be the ideal solution to issuing securities to broaden distribution and increase liquidity.
Koine’s solution has been designed to overcome the risk of client assets being hacked from exchanges and minimise any insolvency risks. How does it do this?
Roda: We are driven by the requirements of our buy-side clients. Their key issue today is counterparty risk, which slows the adoption of these new assets. Most of the digital assets and currencies that exist today are traded on non-traditional “exchanges” that effectively play a plethora of roles but, ironically, not that of a real exchange. They are in effect brokers, custodians, settlement agents, lenders; all in a single vertical integrated entity. This is not acceptable for institutional investors—and a practice that regulators are pushing to change.
We are introducing services that are fit for the institutional investment space, by enforcing a robust segregation of duties and governance process, as well as security in the form of both legal and technical protection as demanded by the Regulator.
This gives institutional investors the confidence they require to enter into this market.
Existing vertical integration also impairs the ability of investors to deploy their cash efficiently to multiple venues; to ensure timely settlement, you must maintain a cash balance at each venue, making the cost of funds unbearable.
Koine ensures interoperability across trading venues, allowing us to centralise liquidity management and deploy capital instantaneously where needed. Clients on the buy-side favour this because they have security of settlement with full protection of their cash at all times, as well as access to a multitude of trading venues.
Throughout 2019, Koine’s offering will be enhanced to support securities and initial coin offering. What are your plans for 2020 and beyond?
Roda: Our priorities are set by our clients: institutional fund managers prioritise over-the-counter venues, which they can rely upon to trade large quantities efficiently. Crypto “exchanges” are less of a priority to them, due to the potential for price manipulation.
Crypto assets are unregulated in most jurisdictions while intermediaries may not operate under the same market discipline that regulators would expect from traditional venues. It is a likely occurrence for the depth of book to disappear when orders are placed.
We target exchanges as they continue to evolve and realise that custody and settlement services are not core to their business model—and in fact, may impair it.
This trend is actually happening as we speak; most of the large exchanges are creating independent entities to provide custody services. Institutions welcome this; however, they require truly independent custodians and interoperable settlement services to reach a broader trading community.
Hughes: At Koine, we’ve got a great team and we’re just about to go live. In September, we are planning to raise money for a big expansion, as we’ve taken on advisors to expand into America, the Middle East and the Far East.
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