Crypto and foreign exchange liquidity provider B2C2 has devised a way for banks to trade on its platform through a unique partnership with its owner, Japanese financial services group SBI.

B2C2 is one of the biggest market-makers of non-listed crypto derivatives, but major dealers are generally restricted from directly trading with it due to internal limitations on credit risk and counterparty quality. This has meant trading activity by B2C2 so far has mostly been with hedge funds and crypto-specialist investment managers.

But about a dozen investment banks are looking to get around this problem by instead trading with SBI – which acquired B2C2 at the end of last year – with the Japanese bank acting as the middleman for trades from B2C2. This would give the dealers access to B2C2’s single-dealer platform for a range of derivatives, including non-deliverable forwards (NDFs), options and structured products linked to the $3 trillion crypto market.

"Given the fact we are the only real crypto liquidity provider that has been bought by a bank and already has relationships with the investment banks, many of them have contacted us to facilitate trades through our parent company SBI,” says Phillip Gillespie, co-chief executive of B2C2.

“We have the supply, investment banks want to trade it, and they want an alternative to CME [bitcoin futures]. Since our parent company already has the relationships with them, all we need to do is facilitate trades SBI to us,” he says.

Gillespie, who previously oversaw FX systematic market-making at Goldman Sachs and was a former FX algo trader at JP Morgan and Barclays, says that with SBI as the intermediary, the credit risk would be against SBI and B2C2 would provide the liquidity. The firm has already spoken to many of the major FX dealers about the trading platform it is developing, which is designed to include bank liquidity providers.

The platform currently has 13 active accounts trading through SBI – all large non-bank brokers – with approximately 12 investment banks pending to go live soon.

Margin savings

So far, only a handful of investment banks have been involved in crypto derivatives. Those that have dipped their toes into the market have leant towards cash-settled products, such as bitcoin futures on CME, as they do not require physical holding or delivery of the cryptocurrency.

As of December 3, average daily volume for CME’s bitcoin futures reached more than 10,000 contracts traded, while open interest stood at $3.1 billion.

However, because of their high volatility and intense balance sheet usage these banks have often been charged very high initial margin by the clearing house. Gillespie says that while some initial margin will be required when trading non-listed crypto derivatives through SBI, “it would be significantly less than the CME margin requirement and most likely close to zero.”

While listed products can take advantage of netting benefits that come from the products being centrally cleared, Gillespie says banks could net off margin requirements for non-listed products with SBI if they can match maturities on the NDFs, for example.

On November 10, B2C2 and QCP Capital announced they had done what was believed to be the first crypto NDF trade. It referenced CME’s Bitcoin Reference Rate and had a maturity date of November 19.

However, Gillespie believes that rather than NDFs, banks will be more interested in opportunities with crypto options and structured products, where potential revenues
are likely to be higher.

Earlier this month, the International Swaps and Derivatives Association said it was developing common legal standards and frameworks for derivatives linked to cryptocurrencies to cover “potential disruption events”.

These events include cyber attacks, forks (when a blockchain technology of different miners becomes misaligned and splits), airdrops (when the market is flooded with the issuance of new tokens, usually for free), and other market-related events. Developing these standards and frameworks would help banks and other financial institutions to become more comfortable with the volatility inherent in the crypto market.

Over the course of the year, B2C2 has hired several industry veterans to bolster its appeal to traditional financial services firms. In March, Brad Nagela joined to develop its options trading platform. Then Nicola White, former global chief operating officer of fixed income, currencies and commodities at Citadel Securities, was appointed president of its US business.

Joe Parsons, Risk.net

About B2C2

More than just a liquidity provider, B2C2 is a digital asset pioneer building the ecosystem of the future.

The firm has unlocked institutional access to crypto by providing reliable liquidity across market conditions. B2C2’s success is built on crypto native technology and continuous product innovation, making it the partner of choice for diverse institutions globally.

Founded in 2015 and majority owned by Japanese financial group, SBI, B2C2 Ltd is headquartered in the UK, with offices in the US and Japan.

B2C2 Ltd is registered in England and Wales under company number 07995888 with its registered office at 86-90 Paul Street, London, EC2A 4NE.  B2C2 Ltd is the parent company of the B2C2 group of companies. Products may be provided by different members of the B2C2 group of companies, depending on the jurisdiction of the client and the regulatory status of the product and/or B2C2 group member. B2C2 is a registered trademark.