Institutional investors have a hard road when it comes to buying large amounts of cryptocurrencies.
The market's shallow, unorganized pools of liquidity mean investors looking to buy more than $20 million-worth of a cryptocurrency often find themselves pulling together investments the old-fashioned way - by cold-calling people they know and putting together the order manually.
But, as global banks and accounting firms show increasing willingness to talk about the potential benefits of investing in cryptocurrencies, ex-State Street executive Hu Liang sees a looming problem: he believes that these large institutions will soon be looking to make massive investments in the asset class.
So, earlier this week, Liang left his position as senior managing director of State Street Bank & Trust's Emerging Technologies Center to meet that demand.
As revealed exclusively to CoinDesk, the platform, code-named "Project Omni," is being designed to serve as "the first large-scale institutional infrastructure specifically targeted towards crypto assets."
"I'm not building a blockchain application," said Liang, who has already gathered a core team of founders, and is currently seeking investment.
"I am building a traditional financial services application that can serve the needs of anybody looking to be involved in crypto assets, whether that's holding it for the long term, whether that's trading it for the short term, whether that's transforming it or using it for a rail for something else."
This isn't the first time Liang has embarked on a similar venture. Back in 2007, he joined State Street (now valued at $35.8 billion) when his previous employer, another deep liquidity pool, Currenex, was acquired by the bank for $564 million.
In this latest effort, he hopes to pool the available liquidity of exchanges and other sellers, making purchasing cryptocurrencies easier for the new crop of institutional investors he expects to be attracted to the market in the near future.
Liang envisions the company as an infrastructure platform that will provide both software and hardware designed to integrate with investment institutions' existing order management systems and execution management systems.
In this way, he hopes his clients will no longer have to create "weird technologies," as he described the ad-hoc solutions to make large purchases of cryptocurrencies, or pick up the phone to conduct old-fashioned voice brokering, which he says results in lost time and "generally increased cost."
The primary customers of the platform will likely include traditional asset management firms, market makers, institutional speculators and anyone who holds a diversified portfolio.
Instead of reimagining the revenue model of traditional infrastructure providers, Liang expects to charge central transaction fees for his platform's services. In the future, he expects to generate additional income from software services and data analytics tools.
Back to bitcoin
Crucial to Liang's decision to build a startup, he said, was a recent shift he has observed in the requests of large institutional investors.
Instead of solely looking to capitalize on the increased efficiency promised by moving aspects of the financial workflow to a blockchain, Liang said those institutions have begun to increasingly want to capitalize on the crypto assets themselves.
That change, he said, is in large part due to the increased market caps of cryptocurrencies, such as bitcoin and ethereum, which are capturing the attention of those looking to diversify their portfolios.
But, more widely, it's initial coin offerings (ICOs) that have "increased the whole value" of the crypto-asset class.
"It almost seems like we've gone in a circle," Liang said. "Because we started with bitcoin, we extracted this blockchain thing out of it, we went really far down that road figuring out what it is, then all of a sudden, we're back to the tail again."
As that interest comes full circle, Liang expects the market for this kind of liquidity aggregation infrastructure to be highly competitive, and soon.
At the moment, there appear to be no formal platforms where investors can easily purchase the large amounts of currency Liang said his potential clients are looking for. Yet, individual counterparties such as Genesis Trading, Cumberland Mining and Circle do appear to be able to handle larger value demands and perhaps the Gemini exchange too, if its daily auctions for bitcoin and ether have large-value sellers.
Going forward, Liang hopes to bolster his founding team by partnering with companies and individuals that could help create those liquidity pools by granting them access to various crypto assets, as well as bringing in software providers to help connect with existing financial infrastructure providers.
"There's a huge first-mover advantage on this. But in order to meet the needs we already see from all the different customers, we have to build this thing out quick."
Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Circle and Genesis Global Trading.
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