Infrastructure provider Copper claims its new trading tool solves an obstacle preventing institutional investors from trading more freely in the cryptocurrency space by letting two parties hold on to their assets until just before executing a trade.
The London-based firm said Thursday that ClearLoop – which facilitates fast, off-exchange settlements – would pretty much negate one of the chief concerns institutional investors have with the crypto space: namely, the risk involved with trusting an exchange to look after their trading capital.
Most exchanges require clients to deposit digital assets with them, in a hot wallet, before they'll allow them to trade. While this is usually not a problem, there's always the risk an exchange might get hacked or, in the case of QuadrigaCX, disappear into thin air.
Known as credit risk exposure, this is the same risk factor that caused many financial institutions to bite their nails off during the 2008 financial crash. For institutional investors with more than a passing interest in the crypto space, the problem of having to trust an exchange to look after their capital precludes many of them from depositing and trading as much as they may otherwise like.
"This is a massive problem in the sector," Copper CEO Dmitry Tokarev told CoinDesk. Many funds try to trade on multiple exchanges – 15 in some cases – and generally perform due diligence and full risk assessments before they use a new one.
"Not only do they not have the capacity to do that assessment, more often than not it's not the investors' field [so] it's hard for them to do it in the first place," he said. He quoted one of Copper's clients who claimed credit risk exposure was almost always the main concern investors had with the cryptocurrency space.
What ClearLoop does is remove this trust element from exchanges. Clients hold their trading capital themselves, either in a cold wallet or custodial solution, while they initialize a trade with an interested party. It's only at the last moment, once the trade has actually been completed, that ClearLoop transfers digital assets from the client onto the exchange and then into the buyer's possession.
Not only does this keep the time the exchange holds a digital asset to an absolute minimum, it radically speeds the trading process. Copper claims ClearLoop takes transaction times down to about 100 milliseconds – about the same as a blink of an eye. Usually, it can sometimes take up to an hour for an exchange to just register a deposit in the first place.
ClearLoop officially went live Thursday following a few weeks in beta. So far six exchanges have integrated it into their trading platforms including Bitfinex, DeversiFI and options exchange Deribit. In a statement, Deribit co-founder and CEO John Jansen said the trading tool would "reduce risk significantly and will improve the way asset managers trade and manage capital."
Tokarev said faster settlement capabilities on multiple exchanges would also create many new opportunities for arbitrageurs. "If you see an opportunity between two exchanges, you deploy the capital and you collapse that basically instantly, in milliseconds," he said.
He added that a handful of high-frequency trading firms have expressed interest in ClearLoop because it enables them to execute the same strategies they use in traditional assets for crypto.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.