PolySign Building ‘FIX Messaging’ for Digital Assets
PolySign, which builds blockchain-enabled institutional grade infrastructure for digital assets, is developing a cross-chain messaging layer that will allow trades in different assets to be seamlessly brought together in one place, which is currently a cumbersome process.
Jack McDonald, chief executive of PolySign, told Markets Media that the infrastructure provider has an initiative that’s been “in the skunkworks” for a bit around building a cross-chain settlement layer for a broad and agnostic group of asset transfers.
He 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.
McDonald continued that PolySign was launched in order to build blockchain-enabled infrastructure for institutions to invest in digital assets and the business began with custody, which he believes is the cornerstone of an asset servicing model.
Standard Custody & Trust Company, a subsidiary of PolySign, was set up in New York in order to become a regulated qualified custodian under the New York State Department of Financial Services, and received authorisation in May 2021. McDonald said the custody business has been growing very quickly since launch and doubling every month in terms of clients and assets.
Being a regulated, qualified custodian is an important differentiator for PolySign according to McDonald. He argued that other crypto-native custodians licence custody software but are not regulated. US asset managers or advisors who manage more than $150m of regulatory capital have to use a qualified custodian such as Standard Custody & Trust Company.
“A fundamental difference is that if a client licenses custody software, they self-custody their keys,” he said. “We are a regulated qualified custodian so we custody the key.”
Standard’s security program combines proprietary blockchain technology, end-to-end encryption and distributed trust protocols to protect secret keys.
McDonald explained that PolySign also uses unique technology which stitches together multi-party key sharding and a hardware security module on a proprietary blockchain designed by blockchain architects Arthur Britto and David Schwartz. Britto, founder and president of PolySign, previously co-founded Ripple and co-designed the XRP Ledger.
In the digital asset world, many exchanges act as custodians and one of Polysign’s fundamental thesis when launching was that these duties should be segregated. McDonald said: “We are not an exchange and only a custodian. Fundamental questions like these still need to be addressed before some of the more conservative institutions wade into this space.”
In March 2022 investment bank Cowen announced the public launch of its digital asset division, Cowen Digital, with Standard Custody & Trust providing custody.
Cowen and PolySign had announced a strategic partnership in May 2021. The bank also made a $25m strategic investment in PolySign and led the $53m initial closing of PolySign’s Series B financing.
Jeffrey Solomon, chair and chief executive of Cowen, said in a statement at the time: “As digital assets continue to grow and mature as an asset class, institutional investors need trusted custody and trading solutions on par with their requirements for investing in traditional securities.”
In April 2022 PolySign announced an acquisition of MG Stover, a digital fund administrator with more than $40bn in digital assets under administration, which the firm said was the world’s largest by a wide margin. Alongside the deal, PolySign completed its Series C capital raise, adding new investors to its shareholder base, including Soros Fund Management, Brevan Howard, and GSR. Cowen Digital also added to their equity position.
McDonald said: “The opportunity to acquire a company like MG Stover doesn’t come along that often. They are by far the leading fund administrator in digital assets and so we jumped at the chance and could not be more excited about it.”
The deal has closed and the firms are in the process of integration. “We are certainly focused on cross-selling our custody business into legacy fund administration clients and vice versa,” he added.
There has been a downturn in digital asset prices this year and cracks in the ecosystem such as lenders pausing withdrawals and the collapse of an algorithmic stablecoin. McDonald said this will result in a flight to quality.
“Some of the problems we’ve seen are going to expose deficiencies or weaknesses in some service providers,” he added. “I think investors will migrate to entities and service providers that are well funded, compliant and overseen by reputable regulators”
In addition, as some of the excess that existed in the market is shaken out, the process of raising money will become a bit more patient and thoughtful. McDonald continued that three factors affect institutional adoption of digital assets – education, infrastructure and regulation.
He said: “Infrastructure has come a long way but we still have more to go.”
For example, three or four years ago there were not any qualified custodial options in digital assets, and few scalable solutions in trading, custody or reporting.
However, standardisation still needs to develop such as the same identifiers for securities being used by the many different exchanges around the world, or common templates for market data or reporting, or accounting standards.
“There is no standard format for messaging between exchanges, custodians, administrators and auditors,” said McDonald. “The roadway and plumbing that has existed in traditional finance does not correlate perfectly to the digital asset ecosystem, nor does the regulatory framework.”
One of the fundamental questions yet to be resolved in the US is whether or not digital assets will be treated as securities. Senators Kirsten Gillibrand and Cynthia Lummis have introduced a framework for crypto regulation which assigned regulatory authority over digital asset spot markets to the CFTC, which regulates commodities.
Once a regulatory framework has been put in place, McDonald expects traditional firms to enter the digital asset space but argued that it will take then some time to build the necessary technology and processes.
“My personal view is that we’re going to see an M&A cycle evolve because when the regulatory window opens for banks to participate in this space there is going to be a buy-versus-build debate and the speed to market question comes into play,” he said.
As part of its growth strategy, Polysign is going to add more services, such as reporting tools, and form partnerships to provide the infrastructure it has built to traditional institutions.
“We want to go to market as comprehensively as possible but in a best-of-breed fashion,” he added. “We don’t have to own everything internally.”