Archax, the first digital asset exchange and broker regulated by the UK Financial Conduct Authority, has officially launched a custody service, an area which has come under increasing scrutiny following the bankruptcy of FTX.
The service is in partnership with METACO, a provider of digital asset custody and orchestration technology, to global financial institutions and is deploying IBM Cloud Hyper Protect Services. Archax announced it had selected METACO in July last year and would fully integrate its bank-grade digital asset custody, issuance and orchestration platform, Harmonize, which was built in partnership with the largest Tier 1 custodian banks globally.
Simon Barnby, chief marketing officer at Archax, told Markets Media that since the collapse of FTX there has been a huge focus on custody and where assets are held, particularly from institutional investors who are regulated businesses.
“The way we have built our custodian, and the way it is structured, is designed to meet those institutional needs,” Barnby added.
Other firms have also launched, or are planning to launch, digital asset custody including Nasdaq Digital Assets, State Street Digital, BNY Mellon and Zodia Custody, a joint venture between Northern Trust and SC Ventures, the innovation and ventures unit of Standard Chartered.
Barnby said: “Our custody is an insolvency remote vehicle, which means it is different to many of the others.”
Assets held on behalf of clients are segregated and backed 1-to-1. Barnby reiterated that Archax will not spend the assets, invest them or use them in any way.
“That is important because clients are concerned that their assets may be at risk if an exchange were to have problems,” he added. “We are taking a traditional institutional-grade approach to the digital asset space in a new and different way for the benefit of clients.”
In addition, Barnby argued that Archax being regulated by the FCA is a differentiator, as other custodians are just registered with the FCA for crypto activities. In addition, he said another differentiator is that Archax treats all assets in custody in the same regulated way including crypto, cash, digital and traditional asset classes.
“We treat all assets the same and I think that resonates particularly well with institutions,” added Barnby. “They are all being held in custody by a regulated entity in a regulated way.”
In the future holding these different types of assets in one place will open up cross-collateralization possibilities, said Barnby.
Consultancy Coalition Greenwich said in a report last year that fully regulated custody of digital assets is important or extremely important to the majority of both sell side and buy side. The survey, Providing Digital Asset Services: An Institutional Infrastructure Roadmap, found that 71% of the sell side and 62% of the buy side believe that fully regulated custody is important/extremely important.
After the collapse of FTX David Easthope, senior analyst who heads up fintech research on the market structure and technology team at Coalition Greenwich, said in a blog that he expects institutional-grade custodians, particularly those with well-established brands, secure technology and healthy balance sheets, will see their solutions more heavily sought after.
Barnby said institutions involved in digital assets are still enthusiastic despite the collapse of FTX, although they may be taking a slower, more cautious approach.
“FTX has caused people to look more closely at who they work with, and look for credible regulated partners with institutional-grade solutions,” he added.
Growth strategy
In November last year Archax announced the closing of its Series A raise of $28.5m which included asset manager abrdn as lead strategic investor.
“The funding round gives us some runway which is a very positive thing in the current market climate,’ said Barnby. “Custody is our first product to formally launch and we are running our exchange in stealth mode before it is rolled out.”
The exchange will have an unregulated market for products such as spot crypto and a regulated market for securities tokens.
Archax has a pipeline of issuers for tokenizing assets including equity debt and real estate, according to Barnby, and Archax is also working on launching exchange-traded products with abrdn. When the funding round closed Russell Barlow, global head of alternatives at abrdn, said Archax and abrdn are well placed to take advantage and meet growing client interest in digital assets that can be accessed through digital exchanges.
Alfred Shang, founding partner of Bitrock Capital, said in a statement at the time: “Tokenisation opens up multiple possibilities for investments, and as blockchain technology continues to revolutionize the financial markets, the digital securities space is indeed the one to watch.”
