By John D’Antona
What is an asset?
As defined by the dictionary it is property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies. In financial accounting an asset is any resource owned by the business. Anything tangible or intangible that can be owned or controlled to produce value and that is held by a company to produce positive economic value is an asset. Simply stated, assets represent value of ownership that can be converted into cash.
So, what is a digital asset then other than the newest market craze? It is largely defined as digitally stored content or an online account owned by an individual. Digital content includes individual files such as images, photos, videos, and text files. It also includes other digital content (perhaps as data in a database).
Traders Magazine recently caught up with Edward Woodford, Co-Founder and Chief Executive Officer at Seed CX, a new all-institutional digital asset exchange. In an interview with editor John D’Antona Jr, Woodford discussed how the exchange has just launched spot trading capabilities in the wake of the recent institutional adoption of digital assets, digital market structure, wallets, margin, operations, surveillance and other areas.
TRADERS MAGAZINE: How difficult was it setting up an all-digital-asset exchange? What makes it different than a regular equities exchange?
Edward Woodford: As with anything that is worth doing, it was a product of a lot of hard work from the 45 incredibly talented people we have here at Seed CX. We are creating the infrastructure for a new asset class, in particular the settlement and custody of digital assets. That said, we are keen to take the best aspects of exchanges in established asset classes, with a strong focus on compliance and operational excellence.
One of the key pain points in the digital asset space is the inefficiency of capital. This is mitigated at Seed CX by offering margin trading. We also uniquely allow collateral to be posted in digital assets.
TM: Why launch spot trading? How is trading normally done?
Woodford: We launched spot trading because the majority of volume in the digital asset space is in spot. Digital asset trading currently occurs on a variety of trading venues and OTC.
In terms of derivatives, we are a regulated Swap Execution Facility. For product launch, we are waiting on regulatory approval to launch digital asset derivatives trading, which we expect will happen later this year.
TM: Has the institutional community readily adopted digital assets? We’ve heard there’s been limited interest – so did you have to incentivize? If so, how?
Woodford: Institutional investors have been interested in digital assets for at least a year, but they have been cautious about entering a market that they may perceive as unstable or insecure. At Seed CX, our mission is to build an exchange that has everything institutions need to feel safe and secure: a market surveillance team, trade prohibitions on the exchange’s employees, multi-user account setup, customizable user privileges, dedicated wallets for every participant and of course making sure the platform is fully licensed and regulated. Institutions are slowly realizing that there should be some allocation to digital assets. The allocated percentage can be adjusted based on the deemed riskiness of the asset, but its low correlation to the equities market makes it useful for diversification.
TM: Can you discuss some of the market structure idiosyncrasies in the digital asset world?
Woodford: In the digital asset world, the concept of asset ownership is very unique. You own the asset if you hold the private key or keys. It is similar to a bearer asset. A lot more responsibility falls onto the exchange and the trader to safeguard the assets as there are no other middlemen or recordkeepers.
The same asset trades with different tick sizes and at different prices and executing at the best bid or offer is the responsibility of the trader – not too different from the early ECN days.
TM: Is trade surveillance a big topic like it is in equities? If so, why and in what areas?
Woodford: Surveillance is a hugely important topic for us at Seed CX. We have a team of surveillance professionals who are experienced from having worked in other markets: our Chief Compliance Officer has both securities and derivatives market surveillance and regulation experience. We also have market surveillance staff who are surveilling the markets and who investigate potential manipulative behavior. This ensures a fair and equal venue for all.
TM: How do you view the digital asset landscape over the next 12 to 18 months?
Woodford: Institutional adoption of digital asset trading will continue to grow in 2019 and beyond, as these kinds of investors become more and more comfortable trading in these venues. I think in many ways, the 2018 Bitcoin slump will actually force the market to mature.
That maturation is exactly what the space needs to attract more institutional investors, whose arrival en masse will improve the market for everyone by increasing liquidity, both directly, via the funds they invest, and indirectly, via the fact of their adoption. Their entry will signal to other traders that the market is stable and trustworthy.
I believe that we will also see a growth in asset-backed tokens. Tokenization has many benefits and I believe its impact will be analogous to the impact of the electronification of markets.