Interoperability Comes to the Fore in Digital Assets
GMEX Group acquired Pyctor from ING as the digital and conventional exchange and post-trade business and technology provider aims to develop interoperability for cryptocurrencies and digital assets which currently comprises of vertical silos and multiple blockchains.
ING said in a statement it has spun out Pyctor, a post-trade market infrastructure for secure digital custody and transactional network services which also delivers interoperability between permissioned and public blockchains. Pyctor was incubated in ING Neo’s Amsterdam innovation lab in collaboration with major financial institutions and regulators.
Olivier Guillaumond, global head of innovation labs & fintechs at ING, said in a statement that Pyctor has been another success story at ING Neo, the innovation division. He said: “We now have found the right partner in GMEX to scale Pyctor to the next stage. It brings the ideal connectivity between multiple trading parties and digital assets custodians, while addressing interoperability issues experienced in the market.”
Hirander Misra, chief executive of GMEX Group, said the firm has developed technology for digital assets since 2017 and has realised there is a real need to look at blockchain interoperability. GMEX had considered building its own technology to address the issue but found that ING were looking to spin off Pyctor as a neutral offering into the wider market.
“Pyctor has been proven through an FCA sandbox with a number of blue chips,” said Misra. “IT has been security battle tested and has a Know Your Customer/Anti-Money Laundering capability. The synergy was perfect and it also accelerates our roadmap of developing infrastructure.”
Misra is named chairman of Pyctor with other senior appointments to be announced in due course. ING will continue its relationship with Pyctor and collaborate through the Dutch bank’s digital assets team.
Last year GMEX addressed the fragmentation and lack of platform interoperability in digital assets by launching the Digital MultiHub. The global cloud-enabled trading and post-trade digital market infrastructure platform was designed with AWS to facilitate third party trading and post-trade services across both traditional and digital asset markets.
Misra explained that GMEX can connect to multiple custodians with MultiHub but Pyctor also allows different blockchain networks to talk to each other through a secure side chain with very low costs via its Multi-Party Computation (MPC) proprietary custody technology.
“The beauty of the MPC solution is wallets are distributed and users can lock exposure to one another to achieve settlement finality without the risk going above that exposure. In comparison to locking up your assets in a given wallet or at a given exchange, this is scalable and capital efficient,” he added.
Further interoperability is important because asset managers do not want to have all their assets in just one custodian.
“The crypto ecosystem is currently full of vertical silos but we are genuinely trying to offer a horizontal solution across the market rather than telling everyone to use our regulated custodian,” said Misra. “We have certainly got to move away from that silo-based complexity.”
He continued that APIs provide some layer three interoperability but level two requires interoperability into multiple public and private chains and ultimately between smart contracts.
GMEX will integrate Pyctor and launch products during the course of this year. The firm has spoken to a number of institutions who want to offer crypto products but also require a trusted enterprise-grade infrastructure.
Misra said GMEX is helping to solve KYC/AML issues but the technology will also be able to plug in services from third party providers who are experts, for example, in coin forensics or tokenization platforms. He believes most institutions do not necessarily want to be on a blockchain, and particularly do not want to be on multiple chains, but want exposure to the asset class through their existing platforms.
“We provide economies of scale so institutions can be on or off chain, use APIs like REST, Swift or FIX,” he added.
For example GMEX Fusion built an API for TP ICAP to connect to digital asset custodians and Misra said many custodians are now connecting so it is becoming a standard.
“As with FIX, the industry has to drive emerging standards so they are commercially adopted,” he said. “We have a lot of background intellectual property that we have created around margining, risk management and the netting process. “
In the long term he expects institutions will be able to put up digital assets as collateral for traditional securities and vice versa. As products evolve hybrid instruments will develop that exist in either form and interoperable infrastructure really helps address this evolution according to Misra.
He said: ”Centralised activities are not going away anytime soon and we can help facilitate that middle ground where everything coexists.”
Misra also believes the current crash in crypto valuations is beneficial in allowing the market to streamline and expose business models that were not viable.
“In the next three or four years we are going to see a period of real innovation and building and there is a real need for that infrastructure play,” he added.
In a year he expects there will be an increasing level of institutional adoption. GMEX is also likely to diversify as the firm is increasingly being approached in sustainability as water, energy, climate and carbon credit markets are fragmented so there is a digital assets use case.
In. June this year PolySign, a financial technology company providing blockchain-enabled digital asset infrastructure for institutional investors, announced the close of its $53m Series C funding round with participation from investors including Cowen Digital, Brevan Howard and GSR.
Jack McDonald, chief executive of PolySign, told Markets Media in June that the infrastructure provider has an initiative to build a cross-chain settlement layer for a broad and agnostic group of asset transfers.
McDonald said: “We are working with some very large asset managers and service providers around building a settlement layer that we are referring to as PolyNet. That is six months away from any kind of roll out in a commercial sense but it’s a really exciting strategy for us that will help take us overseas and open up our client base.”
For example, if an investor wants to trade in fiat currency for a tokenized interest in a real estate building, or a fractional interest in a venture fund, or for a cryptocurrency, all those different trades could be brought together into one ecosystem. The messaging layer is comparable to FIX messaging, a standard in the traditional financial industry across asset classes.
In May this year Talos, which provides institutional digital asset trading technology, announced a $105 mm Series B funding round that values the company at $1.25bn. The following month Talos and Trading Technologies International announced that the firms have partnered to broaden TT’s cryptocurrency offering on a global basis by leveraging the Talos infrastructure and market connectivity from directly within the TT platform.
Anton Katz, co-founder and chief executive of Talos, told Markets Markets in May that market participants are asking more questions about risk management and capital efficiency.
Katz said: “We strongly believe we are going to see other asset classes migrate to digital assets rails. It is almost inevitable and just a question of time.”