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Cowen Digital Counts on First Mover Advantage

Drew Forman, head of Cowen Digital, said the new business aims to do all the same activities in the crypto ecosystem as the financial services group carries out in traditional finance.

Forman told Markets Media: “We want to do everything that we do in traditional finance markets within the crypto ecosystem.”

On March 23 2022 Cowen announced the public launch of its digital asset division with custody provided through its strategic partnership with PolySign’s Standard Custody & Trust and prime brokerage provided by Digital Prime Technologies.

Jeffrey Solomon, Cowen

Jeffrey Solomon, chair and chief executive of Cowen, said in a statement: “Through Cowen Digital, our clients now have access to the crypto and digital asset markets with our institutional quality and fully integrated end-to-end execution and custody capabilities.”

During 2022 Cowen Digital plans to roll out lending capabilities, including borrowing and shorting tokens, as well as lending generally into the crypto ecosystem. In addition the business aims to launch swaps and derivatives, and expand in Asia and Europe. Some of these products  are due to be launched at the end of the second quarter or early in the third quarter of this year.

“We will also be rolling out our algorithmic technology and we are working with the buy side and vendors to be able to route orders in the same way as we do in equities,” Forman added.

He explained that the crypto market structure is very complicated, with more than 490 exchanges, dozens of market makers, and continuous trading on a 24/7 basis. As a result  certain types of algos from traditional markets cannot be used and Cowen Digital aims to solve those challenges for clients.

It is also harder to find liquidity due to the fragmented market so relationships are important due to the larger share of bilateral trading. Forman argued that Cowen Digital has good relationships with many crypto market makers, some of whom overlap in the equity space.

“We are trying to be thought leaders in setting standards for best execution and compliance,” said Forman. “We work with outsourced data providers to provide trade history but the industry does not have standards for any of this.”

By the end of this year Cowen Digital would also like to be working with the firm’s  investment bank to become leaders in capital raising for early-stage digital asset companies and helping institutions to become involved in decentralized finance (DeFi) and non-fungible tokens (NFTs).

“We are meeting and investing in companies that we would never have had access to without the digital assets business,” added Forman. “It’s really exciting to be able to help those companies and partner with them to offer services to our clients.”

First mover advantage

Cowen Digital is live trading spot crypto and 16 tokens. Forman said the whole firm has been working on the new business for 18 months and has been onboarding and trading with customers for a few months.

“We brought together groups of talent to get Cowen Digital off the ground from technology to legal to compliance, as well as the infrastructure builds,” he added.

Customers range from crypto-native hedge funds to asset allocators and Forman said they are between three to nine months away from making big investments in the crypto space. Cowen Digital is providing education to help them through their internal compliance processes as getting comfortable with trading this new asset class from a compliance standpoint, especially on custody and counterparty risk, is top of mind.

 Drew Forman, Cowen Digital

“Our brand is bringing comfort to larger institutions who want to trade crypto with someone they know,” added Forman.

He believes that trading cryptocurrency with clients in a regulated manner and being one of the early leaders provides a huge competitive advantage.

“There are a lot of crypto-native providers but our peers in the top 20 investment banking space are not in digital assets in a meaningful way,” he added. “To launch in digital assets requires coordination among senior members from different teams and Cowen is very entrepreneurial.”

In the United States, crypto is regulated state-by-state so Cowen Digital is also in process of applying for, or has received, money transfer licences. Every country also has a different regulatory regime and Cowen Digital is taking a long-term approach of achieving the highest level of compliance and getting the necessary licences to trade.

Custody

Custody is being provided through Cowen’s strategic partnership with PolySign’s Standard Custody & Trust, which has received a trust company charter from New York State Department of Financial Services as a regulated qualified custodian of cryptocurrencies and other digital assets. Standard’s security program combines proprietary blockchain technology, end-to-end encryption and distributed trust protocols to protect secret keys.

Forman said: “We have a partnership with PolySign, which we think is one of the best institutional custodians in crypto, but we are also able to trade into multiple custodians.”

Arthur Britto, founder and president of PolySign, previously co-founded Ripple and co-designed the XRP Ledger. In May 2021 Cowen made a $25m strategic investment in Polysign as the firm led a $53m Series B financing.

Solomon said in a statement: “Led by a best-in-class team of cryptocurrency and financial services pioneers, PolySign has developed proprietary, next-generation blockchain technology that we believe will be foundational to the development of secure, trusted digital asset infrastructure.”

Jack McDonald, chief executive of PolySign, said in a statement at the time that Cowen’s partnership showed the growing significance of digital assets as an asset class.

“Institutional momentum in the digital asset space is strong, and with the support of Cowen – both through its capital investment and this cutting-edge partnership – we’re positioned to significantly expand our market-facing abilities by bringing innovative solutions to capital markets,” added McDonald.

In April this year PolySign announced an acquisition of MG Stover, a digital fund administrator with more than $40bn in digital assets under administration.

Matt Stover, founder and chief executive of MG Stover, said in a statement: “Our success in building institutional best practices for the digital asset ecosystem has helped foster a sector that has grown to over $2 trillion of assets.”

Polysign said the acquisition will enable the firm to deliver a comprehensive, vertically integrated custody, trading and administration offering to institutional investors for cryptocurrency and digital assets.

iaAlongside the deal, PolySign will complete its Series C capital raise, adding new investors to its shareholder base, including Soros Fund Management, Brevan Howard, and GSR. Cowen Digital will also add to their equity position.