If the wild price of moves of bitcoin from 2013 to 2014 did nothing more than get people’s attention about the blockchain than arguably it can still be deemed a success for the digital currency. While a lot of the media attention in bitcoins has been focused on its price moves and questions of whether it is a legitimate currency or not, it is quietly gaining interest as a technology of the future in the financial industry. Specifically, financial firms are investigating how the underlying blockchain technology, whether in the form of bitcoins or other decentralized currencies can be used to optimize the foundation of their businesses.
During the fintech panel of last November’s Forex Magnates London Summit, Tom Robinson of Elliptic was asked about interest in bitcoins from banks and brokers. Robinson explained that they were receiving a lot of questions from firms that were investigating the blockchain. He conceded though that banks weren’t yet ready to publicize their interest due to the headline risk associated with bitcoins. The real interest though is slowly becoming public and hit a new level in January when the New York Stock Exchange as well as Citibank’s former CEO were among investors in Coinbase’s record $75 million funding round.
Similarly expressing Wall Street’s interest in both the moves of bitcoin prices and the underlying blockchain technology is SolidX. Learning more about their bitcoin derivatives business Digital Currency Magnates spoke to CEO Daniel H. Gallancy, and President David S. Lehmann.
Based in New York, SolidX raised $3 million in funding last October. The firm’s core business is to provide hedge funds and asset managers access to the bitcoin markets. They do this by marketing bitcoin swaps that act and behave like swaps of other asset classes. But, beyond their swaps business, Gallancy and Lehmann explained that their institutional customers are also seeing potential in the underlying blockchain technology. Lehmann referred to the dual nature as the little “b”–bitcoins–and big “B”–the blockchain.
SolidX’s main existing business is the issuance of total-return bitcoin swaps to their clients. Buyers of the swap are able to gain exposure to bitcoin’s price moves during the duration of the swap, without actually needing to hold bitcoins. Gallancy explained that the benefit to hedge funds and other financial customers is that with swaps, bitcoins are made available to them in a way they are familiar with, and the product “looks and feels like any other traditional security.”
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Like other swap dealers, SolidX acts as a counterparty to their clients, but hedge their sold swap positions by acquiring actual bitcoins. The firm also works with a large insurance firm to insure the swaps they provide to customers have an added layer of caution to mitigate counterparty risk. Gallancy and Lehmann explained that the firm has been able to gain interest from funds that are using their swaps to gain both long and short exposure to bitcoins.
In terms of asset sizes, Gallancy noted that bitcoin positions are a bit different than your usual position sizes opened by a hedge fund. So while a firm regularly take a position in a stock or asset that is 5% of their total assets, when it comes to bitcoins they are typically looking at the digital currency like they would an option. As a result of the boom or bust binary expectation, many bitcoin swap positions are in the 0.2% to 0.3% range, with swaps valued in the single millions to low double digit millions of dollars.
Speaking about the underlying bitcoin technology, Gallancy said that the “institutional sector was far more interested in blockchain than we expected.” He explained that many financial firms are using older technology, with the blockchain being investigated as one of several possible new solutions to help companies like banks modernize their technical infrastructure.
In relation to whether firms may ultimately shy away from the blockchain because of the headline risk involved with bitcoins, Gallancy and Lehmann didn’t believe so. In their eyes, the fact that the NYSE was an investor in Coinbase and the federal government viewed the currency as an asset means the “battle of legitimizing bitcoins is over.” What Gallancy did mention is that regardless of an emerging positive impression of the blockchain, banks will remain quiet about their interest in the technology for the simple reason that “people like to keep their cards close to them” and want to retain their internal trade secrets.
So where could the blockchain emerge as a viable technology to help banks and financial firms with their businesses? Due to their own confidentially agreements, Gallancy and Lehmann couldn’t provide specific examples of what their clients and the institutional sector have in mind, but mentioned that many of the big “B” conversations are in relation to clearing, settlement, and custody of funds and securities. As a decentralized technology, the blockchain is a public ledger which could make it the ultimate accounting software for any transfer of payments, assets or goods.
Overall, as SolidX positions itself as a swaps provider to meet Wall Street’s demands of trading little “b,” they aim to be part of what could be an equal or larger trend with the further implementation of big “B” to the financial world.