A month after the United State’s Securities and Exchange Commission’s decision to deny Bitwise Asset Management’s application for a Bitcoin ETF, the industry is once again faced with the question of what needs to be built in order for institutional capital to move more seriously into the space.
However, there are a growing number of companies that are working to identify what’s missing from crypto and to build the platforms that the industry needs to flourish as an institutional investment class.
Recently, Finance Magnates spoke to Marc Bhargava, co-founder and President of New Jersey-based electronic agency prime brokerage Tagomi, a company that’s been working to create institutional-grade brokerage services within the cryptocurrency industry since January of 2018.
Since its inception, the company has expanded into several cities across the country and in the UK, and has formed partnerships with some major players within the space, including ICE’s Bakkt and Binance. Tagomi was also recently granted a BitLicense from the New York Department of Financial Services.
Marc spoke with us about the history of the young company, as well as plans for the future and predictions of what’s coming next for crypto.
The following is an excerpt. To hear the rest of Finance Magnates’ interview with Marc Bhargava, please visit us on Soundcloud or Youtube.
The making of Tagomi
Despite the fact that Tagomi is less than two years old, the company has already put down roots in several cities across the United States as well as overseas.
“We have 20 people, [and] we’re primarily in New York and New Jersey, but we have offices in Chicago,” where the company’s COO and Director of Engineering are based, as well as an office in San Francisco, where the company’s front-end and design team members are.
Tagomi also has “a few folks out in London as well,” which Marc says is because “we’re now trading 24-7.”
Marc explained that the company was first conceived after in 2017, he began “hearing a lot of folks in the market asking for an institutional platform to trade crypto. Retail investors had their exchanges; they had the Coinbases or Binances or Krakens of the world.”
“But someone looking to do larger trades and wanting to do them electronically rather than calling an OTC, wanting to use more advanced algo types, wanting to do things like lending and shorting–and most importantly, wanting it done on an agency basis (meaning wanting someone to execute these trades and then post trade reports and show them how they did it in the best possible way for them–none of [those features] really existed, because it was a really nascent market.”
Co-CEO @GregTusar at the Multicoin Summit explaining the parallels between crypto market structure today and the evolution of other asset classes: https://t.co/fPvYlMib7p
Thanks for a great panel @TusharJain_ @multicoincap
— Tagomi (@tagomisystems) May 20, 2019
Bhargava said that his co-founder, Jennifer Campbell (who was at Union Square Ventures at the time) “were looking for this company for a year–[this company] that could be a more institutional prime broker service that was both electronic and was agency-based, and we didn’t find anyone that was really compelling. It was only when we found our co-founder Greg Tusar that the three of us decided to team up and start it in January 2018.” Tusar was previously a senior partner of electronic trading at Goldman Sachs for 13 years.
— Tagomi (@tagomisystems) August 1, 2019
After Bhargava teamed up with Tuscar and Campbell, the three of them “raised our first round from Peter Thiel’s founders’ fund, and in 2018, really built out the team and product.” Tagomi’s services began to go public at the end of that year and throughout the first half of 2019.
What does Tagomi do?
One of Tagomi’s primary product offerings is something that the company calls Best Execution Trading. “What that means is that if you came to us with a million dollars, we would break that up into many small pieces and smart route it across ten market makers and exchanges where Tagomi has accounts.
“So, instead of you having to open up accounts on all of these exchanges and develop market-maker relationships, Tagomi already has that…so you can come just to Tagomi and do that $1 million trade, and it’ll get executed across 14 liquidity sources.”
Marc added that Tagomi’s service also results in a better price for users wishing to execute large trades: “we’ll route to wherever the price is best, [and] if it’s a very large trade and it can move the market, it’s also obviously helpful to spread it across [multiple] liquidity sources, and even to use things like [algorithmic trading]–we’ve done some very large orders [that are executed] over hours or even days.”
— Binance.US (@BinanceAmerica) November 21, 2019
“So, that’s the concept of Best Execution–we’re not the other side of the trade. We’re not holding Bitcoin on our balance sheet to sell to you and mark it up and chat with you over the phone–we are here to use technology to help you do larger trades with better execution, and for every trade, we’ll give you a trade report showing exactly how we did that trade.”
Marc continued to explain that this is something that could potentially be used to build out the cryptocurrency ecosystem more broadly: “folks like Bitwise, for example–they’re working to be an ETF. In the ETF world, it’s a requirement to have best trade execution and that you work with an authorized participant.”
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Therefore, he said that this is why companies like Bitwise use Tagomi’s services. “So do the crypto funds, and their limited partners, who get lower fees because they’re using our technology.”
“We’re very focused on being a prime broker”
And Tagomi is committed to staying on the “service” side of the industry rather than offering Bitcoin or other crypto trading options. “We’re very focused on being a prime broker,” Marc said.
In addition to best execution, Marc said that Tagomi also helps clients integrate with custodians. One recent example of this was Tagomi’s presence as one of the first three clients on Bakkt’s custody product. He added that on the custody side of things, Tagomi also works with Coinbase, Bitgo, and Gemini, among others.
The company has also begun offering a service that allows its customers to “lend out” their digital assets and to use margin to buy more of them. “With folks lending and borrowing on the platform to facilitate shorts as well, it’s really the full functionality of prime brokerage.”
Excited to work with this talented team! https://t.co/6g6scIYsxs
— Tagomi (@tagomisystems) November 12, 2019
Marc explained that in this way, Tagomi has been built to be the company that his team believed to be absent from the cryptocurrency industry: “this full prime brokerage function we’ve really seen missing from the space, especially on a more agency basis or a more technology basis.”
“It’s generally bespoke things that people might do over the phone with higher markups and things like that–and we’re looking to really change that and [make crypto] look a lot more like equities.”
Potential in Asia
Marc told FM that Tagomi eventually has plans to expand further into Asian markets.
“A market that is really interesting for us, where we get a lot of inbound interest (and probably haven’t serviced it as well as we should to date) is what’s going on in Asia.”
Specifically, “for us, Hong Kong and Singapore make a lot of sense–you have people from New York or from London that have opened up trading shops there; they have very similar demands as our clients in the west, so they’ve been kind of our ‘sweet spot.’”
“But if you expand outside of that,” Marc continued, “Japan and Korea both have a very strong crypto retail presence, and increasingly in Japan you’re seeing a little more FX to crypto; in Southeast Asia you’re seeing stablecoin adoption growing, and a whole layer of payment providers using stablecoins out there.”
“And then in mainland China, you’ve seen a lot of the mining industry, but also three of the world’s largest exchanges that also run large OTC shops. And, recently, with the president’s comment…there are effects coming out of that as well.”
Institutional capital has hit crypto in several “waves”
We asked Marc about what seems to be the most popular narrative within the cryptocurrency industry surrounding institutional capital–that there’s a “wave” of institutional capital that’s just waiting around the corner for when the industry has built the right products.
Speaking from the perspective of a company that has worked with institutional investors, Marc said that “it’s come in different waves, and certain things have been different from what we expected.”
— Arthur (@Arthur_0x) October 28, 2019
“The first wave,” which started in 2017 and grew in 2018, “was crypto funds and index products. So I think you still see a lot of family offices or endowments or others not directly buying Bitcoin, but investing in funds. If you look at a crypto fund like paradigm, it has Sequoia in it, it has Yale’s endowment in it–it has a whole slew of family offices and endowments.”
“And so, you know–you haven’t seen a lot of the direct investing there, but you do see this growing group of crypto funds in addition to Paradigm,” including Paradigm, Multicoin, and Polychain. “Many people are investing through the crypto funds, and I think that’s part of the first wave, [in addition] to the index products like Bitwise.”
“The second wave,” which Marc believes started in 2019, has a lot more to do with “quant funds–the ability to go both go long and go short.” This also includes “lending markets and the ability to borrow.”
Marc has also observed “a lot of market makers enter to provide more liquidity on exchanges–really large market-making shops in Chicago and New York and globally.”
A wave of “big tech” is headed for crypto in 2020
In 2020, Marc predicts that the next rush of institutional capital into crypto will come from a “big tech wave,” which includes Facebook.
“We were expecting maybe Morgan Stanley or Goldman or JPMorgan to be more involved in crypto in 2017 when we were talking about when the institutions [would be] coming. But we’ve seen now some of the world’s largest institutions at least stake a claim and say that they’re coming–Facebook is a huge example of that, but there’s also Square and SoFi, and others as well.”
“So, I think that this next 2020 wave of ‘institutional’ investors is really these large tech firms,” he said. “And I think that down the road, you definitely will see more from the traditional asset managers–right now, we see more of the family offices who have broader discretionary ability to invest in things, or funds that are primarily hedge funds run by a couple parts.”
“The larger asset managers will also eventually come, but to get them involved, you need better infrastructure–and you also need more use cases, and I think you need more scalable protocols and mass adoption.”
“But that’s what’s exciting about this upcoming tech wave,” he said. “I think they have a lot of the distribution mechanisms to really help that.”