LMAX Digital and Zodia Custody are to provide institutional-grade trading infrastructure and custody to CoinShares.
A trio of European cryptocurrency firms are teaming up to bolster their digital asset trading offering to institutions.
Crypto exchange LMAX Digital and Standard Chartered-backed custodian Zodia Custody are to provide institutional-grade trading infrastructure and custody to digital asset manager CoinShares (CS.ST), according to an emailed announcement on Wednesday.
CoinShares will make use of LMAX’s trading capabilities and Zodia’s Interchange product, which allows clients to keep their assets on its platform, while their holdings are mirrored and available on an exchange for trading.
The three firms’ aim is to offer institutional adopters with the trading infrastructure, security and governance that they would expect in the traditional finance world, thereby assuaging concerns about the digital asset industry heightened by the events of the past year.
“This joint effort with Zodia Custody and LMAX Digital is aligned with our long-term strategy,” CoinShares CEO Jean-Marie Mognetti said. “We are committed to shape a reference standard for digital asset management.”
Edited by Parikshit Mishra.
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The political movement to use state commerce rules to stop central bank digital currencies is based in legal nonsense that has no power to ban anything, experts contend.
The state-level campaign against a U.S. digital dollar made its first foray into established law with Governor Ron DeSantis’ signature on Florida’s effort to block the use of virtual government-backed money in business transactions.
But the Florida governor’s rhetoric that his state is banning central bank digital currencies (CBDCs) as “government overreach and woke corporate monitoring” may not amount to much on paper. Legal experts in this facet of commercial law suggest the state’s effort is nonsensical and potentially harmful for the digital assets sector DeSantis said he’s trying to protect.
“They didn’t ban anything,” said Carla Reyes, an assistant professor at Southern Methodist University’s Dedman School of Law, who has done work in both digital assets law and the Uniform Commercial Code (UCC) that Florida is focused on. “The law does exactly zero of the things that it says that it does.”
The state’s new tweak “expressly prohibits the use of a federally adopted CBDC by excluding it from the definition of money within Florida’s Uniform Commercial Code,” according to the governor’s office. From introduction to his signature last week took just 43 days.
DeSantis – one of the Republican Party’s early favorites as a potential presidential candidate next year – turned his May 12 signing of the law into a political event, claiming it as the start of a potential multi-state push from Republican state lawmakers to counter a digital dollar well before the federal government decides whether to issue it or not. North Carolina has also been considering a measure to oppose a U.S. CBDC, and South Dakota Gov. Kristi Noem recently vetoed a bill to update its UCC in a way she argued would have allowed for CBDCs and “a potential future overreach by the federal government.”
“We’re on offense in the state of Florida,” DeSantis said at a press conference, standing behind a sign reading “Big Brother’s Digital Dollar,” referencing George Orwell’s tale of supreme government control, “1984.” The new law – effective in July – declared digital dollars won’t be considered money in the state’s version of the commercial code.
The UCC represents an accord among states, which have largely adopted this common set of rules for buying and selling of goods and conducting other financial transactions across state borders. Florida has officially thrown its CBDC wrench into that standardization, saying digital dollars aren’t money as defined in the code. But it doesn’t really ban CBDC use in interstate commerce, just puts those assets in another category than money, lawyers say.
“I could still buy a computer using CBDCs if that’s what they wanted me to pay in,” said Reyes, who said the government-backed assets would now fall into the bucket of “general intangibles” under the UCC. “The UCC doesn’t have the power to ban people from using any type of exchange. That’s not what it does.”
CBDC Opposition
DeSantis called the CBDC “a massive transfer of power from individual consumers to a central authority,” and he said the federal government would “have the ability to control where that money is going,” citing a future government’s ability to stop gun purchases or halt somebody from buying too much gasoline.
Though DeSantis and other Florida Republicans suggest the U.S. is definitely heading toward issuing a digital dollar, that view isn’t yet reflected by what’s happening. While the administration of President Joe Biden is under orders to develop the concept of a U.S. CBDC, no federal entity has yet declared support for issuing it.
The Federal Reserve would be in charge of the digital dollar, and officials including Chair Jerome Powell have said the central bank won’t act without backing from the White House and Congress. The Fed also doesn’t want to be in the retail CBDC business, so officials have declared that it won’t administer individual accounts and that people’s transactions would have to be managed by banks or in other outside digital wallets.
DeSantis acknowledged that if Congress eventually authorizes a U.S. CBDC, the state may have to back down. But more than that, Andrea Tosato, a legal scholar who has advised on UCC amendments and teaches at University of Pennsylvania’s Carey Law School, said that any federal law on this point will automatically override state law.
If that happens, though, it won’t have anything significant to override in Florida, he and Reyes suggested.
The UCC Reality
The UCC represents longstanding, battle-tested standards for basic transactions, and they‘re meant to be “super boring” and nonpolitical, Tosato said. The Florida effort to use it as a shield against digital dollars is “painting the UCC as something that it is not.”
The UCC gives both sides of transactions basic legal protections, Tosato explained, but it doesn’t tell them what they can or can’t exchange. That’s the job of regulations or criminal codes.
When one digs into “the rabbit hole and the craziness of what was done with this Florida bill,” Tosato said, “there is no light-bulb moment. It makes no sense.”
The governor’s office didn’t respond to a request for comment on these points. DeSantis suggested during his press conference that he wasn’t just protecting people’s financial privacy but was also seeking to defend crypto from federal government interference.
“I think they want to crowd out and eliminate other types of digital assets like cryptocurrency, because they can’t control that,” he said.
While Florida rewrites its single-state corner of the 50-state standards, though, it’s also rebuffing a set of amendments suggested last year that were meant to set standards for the interstate use of cryptocurrencies, including in such examples as the use of bitcoin as collateral in lending. That could have been a foundation for digital assets in commerce, Tosato argued, and other states have been moving forward to adopt the changes.
Even the way Florida defines a CBDC could be problematic. Its new law says a CBDC is a government-issued digital currency “that is made directly available to a consumer,” but Tosato contends that doesn’t reflect any of the current or planned CBDCs, which generally have service providers manage the accounts or wallets for using the virtual currency.
“There is no CBDC anywhere that is issued directly to consumers,” Tosato said.
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As DeSantis and his allies celebrate their CBDC ban, Tosato says they’ve compromised the UCC’s crypto modernization and are misrepresenting the meaning of their overhaul of Florida law.
“It’s done in a way that makes no sense and is completely broken,” he said.
Franklin Templeton claims that fund will be the first U.S. registered mutual fund run on blockchain technology.
Franklin Templeton, with about $1.4 trillion assets under management, said its OnChain U.S. Government Money Market Fund (FOBXX) is now supported on Ethereum via layer 2 blockchain Polygon.
The investment giant said in a press release, during Consensus 2023, that it continues to see operational efficiencies through use of blockchain-integrated systems, including increased security and faster transaction processing.
Read full coverage of Consensus 2023 here.
The fund is the first U.S. registered mutual fund to use a public blockchain to process transactions and record share ownership, the investment firm claimed in the press release. On Monday, the Stellar Network announced the fund is available on its network. Stellar has a $2.5 billion market capitalization and Polygon’s is over $9.5 billion.
“Extending the reach of the Franklin OnChain U.S. Government Money Fund to Polygon enables the fund to be further compatible with the rest of the digital ecosystem, specifically through an Ethereum-based blockchain,” said Roger Bayston, head of digital assets at Franklin Templeton, in the press release.
Franklin Templeton, which has been a proponent of blockchain technology in the past, continues to see operational efficiencies through use of a blockchain-integrated system, according to the statement. The firm announced in September that it will offer digital asset strategies to wealth managers.
The fund, which aims to provide steady income for its holders, invests at least 99.5% of its assets in government securities, cash and repurchase agreements. Money market funds are mutual funds that invest in highly liquid and short-term investments that intend to offer investors with low-risk options.
In the wake of recent market volatility and banking crisis, investors have been pouring into money market funds to hedge their investment risks. With more institutional investors pushing further into digital assets, traditional finance (TradFi) players are using this opportunity to merge both worlds by offering such funds via blockchain technology. Most recently, Ondo Finance said it is offering a stablecoin alternative that will be pegged to the U.S. dollar and backed by money-market funds that trade on traditional exchanges.
One share of Franklin Templeton’s fund is represented by one “BENJI” token, where the holders are able to gain exposure to the fund through digital wallets via the Benji Investments app, according to the press release.
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“Tokenized assets are going to positively rewire the global financial system, and Franklin Templeton is at the forefront of this movement,” said Colin Butler, global head of institutional capital at Polygon Labs, in the press release.
DWF Labs made headlines with more than $200 million of investments in crypto projects such as CryptoGPT or Synthetix. A closer examination reveals that many of their deals aren’t typical venture capital investments, but packaged with market making services, pledges to boost trading volume or even selling tokens directly for a project’s treasury. Industry experts claim red flags and conflict of interest, but the firm says it’s all a misunderstanding.
The giants of crypto venture capital are mostly a well-known group of firms that’ve been around for years, companies like A16Z, Paradigm, Pantera Capital and Digital Currency Group (CoinDesk’s parent).
So the quick and loud emergence of a firm called DWF Labs as a seemingly large player in the space over the past few months caught many by surprise. They announced through press releases and media organizations like CoinDesk and The Block a slew of investments in projects including $40 million for internet alternative provider Tomi, $40 million for artificial intelligence-related token Fetch.AI and $10 million in AI-focused crypto data project CryptoGPT.
But a closer examination reveals DWF, whose founders made their money as crypto high-frequency traders, isn’t exactly a venture capital firm – not always, at least.
While the recent slew of headlines refer to DWF’s partnerships with crypto projects as ‘investments,’ DWF Labs actually functions more similarly to an over-the-counter (OTC) trading desk. The company typically approaches a crypto project with a token, and offers to buy millions worth of the token at a discount to market value, according to conversations with several crypto projects that have worked with DWF.
But DWF Labs says it’s all a misunderstanding. “There might be some questions on the use of the word investment,” said DWF Labs Partner Stefano Virgilli. “When we use the word ‘investment’ – to us the most important thing is that if we’re purchasing the tokens and they’re using the funds to further develop, that’s an investment,” he added.
The controversy
Investments in crypto projects typically follow a venture capital model. Projects tap venture firms for capital via funding rounds (i.e. pre-seed, seed, Series A, etc.) and, in turn, the investors receive a portion of the project’s equity. In most cases, particularly in early stage investments where a project has not yet launched a token, investors will receive a Simple Agreement for Future Tokens (SAFT), a contract that outlines the tokens allocated to the investor if the project launches a token in the future.
DWF Labs’ investments are more ad hoc in nature and the company primarily selects for projects that have already launched a token.
While DWF Labs refers to itself as “a global web3 venture capital and market maker” or “multi-stage web3 investment firm” in press releases, the deals are often presented as “strategic partnerships” that can include token acquisitions, market making services, pledges to boost a token’s liquidity and trading volume, and additional support with marketing and media presence.
Even helping projects’ treasuries to sell their token holdings, according to the press release the firm distributed about its launch in September.
In the post, the firm said that “DWF Labs invests in digital asset companies and supports existing markets, enabling digital asset companies to sell their tokens for up-front capital without adverse price impact,” adding that “DWF Labs buys tokens with its own funds, allowing its corporate customers to sell tokens quickly.”
It is quite common in the crypto industry for market making firms to have venture capital arms. Jump Crypto and Wintermute, two heavyweights in the crypto market-making sector, both began as trading firms. But both have since expanded into cutting venture checks for projects, and even building their own pieces of core infrastructure (Jump has backed the Wormhole cross-chain bridge and Wintermute has launched its own decentralized exchange).
However, the industry standard is that these contracts should be separated. Even though the lines between the two divisions can be blurred sometimes by the market makers, some industry observers have grown concerned about DWF’s recent activity and seemingly packaging different services under partnerships.
“It’s a massive conflict of interest,” Walter Teng, research firm Fundstrat’s vice president of digital assets, told CoinDesk. “If you invest, you want the token’s price to go up. If you market make, you can manipulate the price to go up by spoofing.”
“All of their ‘investments’ are poorly disguised agency OTC (over-the-counter) trades,” a market making firm’s executive told CoinDesk, who asked not to be named due to company policy. “They make a big announcement about ‘partnerships, investments’ or some other nonsense, but in reality it is a way for token projects to sell their treasury without announcing that they are selling their treasury.”
DWF’s managing partner Andrei Grachev defended the firm’s token maneuvers in a recent tweet, calling it “dumb” if a market maker (MM) leaves all the acquired or borrowed assets in a wallet, because an “MM should create markets, provide depth, improve order execution instead of doing nothing and waiting when the market is skyrocketing to execute its call options.”
DWF Labs’ strategy
DWF Labs launched in September, as an investment-focused arm of Digital Wave Finance, a top high-frequency trading firm that trades spot and derivatives on over 40 exchanges, according to the firm’s press release.
Grachev told CoinDesk that DWF Labs’ funding comes from the money earned from profits of the high-frequency trading business. Grachev denied that the firm has received any funding from Russia, a rumor circling within the crypto industry.
Grachev said that the firm has multiple types of investments, some with token lock-ups, others without vesting period, and focuses on projects with tokens. “We prefer to have tokens but we also have several equity deals,” said. “But frankly with equity…it is not our strong side,” he said.
While he said that DWF Labs “usually do not include market making deals in our venture side,” later, he admitted that “we have pure investments without market making, we have market making [agreements] without investment, and we have [them] combined.”
“As a market maker, of course we support our portfolio. If we invest, we will provide much more liquidity to the project compared to if we don’t invest,” Grachev said.
When asked about DWF’s investment strategy and due diligence, Grachev talked about focusing on five sectors – TradFi, DeFi, GameFi, CEXs and artificial intelligence – and aiming to “have stakes in all major chains (…) in order to have access to their ecosystems.” The firm looks for projects with “life and traction,” he said, checking social media posts and what exchanges their token is listed on.
“If a project is listed on BitFinex, Coinbase or Binance, then the project is proven and good because these exchanges have very strict due diligence and very strict policies of listing,” he added.
Grachev also said DWF doesn’t usually participate in specific venture rounds. “We just approach them,” he says.
CoinDesk viewed a series of messages between DWF Labs and a crypto project that showed a member of the DWF Labs team offering to invest in the project and provide free market-making services. DWF told the project it could invest via a direct OTC purchase of liquid tokens from the project’s treasury, or with a lock-up period and market-making services.
Messages from the market maker to another project showed that DWF offered to buy tokens in daily tranches without any lock-up period at a discount or in one installment with a one-year lock-up at a steeper discount. According to the message, DWF promised to help list the token on Korean exchanges including Binance Korea which the firm has “good relationship” with, create options trading and “build narrative” leveraging DWF’s team and media presence.
There were several past announcements when DWF mashed investments and market-making deals.
One instance was its strategic partnership announcement with derivatives trading platform Synthetix. According to a press release on March 16, the firm said it acquired $15 million of the project’s native token SNX “aimed at boosting liquidity and market making,” adding a quote from Grachev that “we are thrilled to invest in Synthetix.”
Blockchain data shows that DFW’s wallet – labeled by crypto intelligence firm Nansen – received 5.3 millions of SNX directly from Synthetix’s treasury wallet between March 14 and March 16. Then, the firm transferred all tokens to Binance in multiple transactions between March 16 and 20.
Transactions between DWF Labs and Synthetix treasury. (Nansen)
In November, DWF announced a $10 million investment in the TON ecosystem. The firm’s press release said that the “strategic partnership” with the project extends to “an investment, token development, market creation and exchange listing.” The partnership also includes “50 seed investments scheduled over the next 12 months,” doubling the TON token’s trading volume in the first three months of the partnership, and developing an OTC market “to let buyers and sellers complete large transactions.”
Another case is the firm’s investment into web3 influencer platform So-Col. According to a story by crypto-focused publication The Block and cited on DWF’s website, DWF invested $1.5 million in “a round” by purchasing So-Col’s native token SIMP in February. Irene Zhao, So-Col’s founder, said that the tokens have a one-year vesting period ending in February 2024. The post does not mention other services besides investing.
However, Nansen’s blockchain data on the Ethereum blockchain shows that DWF’s crypto wallet received 3.3 million SIMP tokens between March 6 and March 24. Within the same period, DWF sent some 2.6 million tokens to KuCoin exchange, then transferred the rest to an unknown wallet on March 30. After the announcement on March 28, SIMP almost doubled from around 1.7 cents in a week, then started to plummet on April 4 towards 1 cent, per CoinGecko data.
CoinDesk reviewed Telegram messages of a So-Col representative saying that they decided to work with DWF Labs because besides serving as a market maker DWF also invested in the project directly helping to extend the startup’s runway.
Sending tokens to exchanges
Grachev said that DWF Labs keeps most of its funds and investments on centralized exchanges (CEXs) and transferring tokens to an exchange does not indicate the company will sell.
“We keep all of our inventory, almost all of our inventory, not only our investments but our own funds on exchanges,” he said.
However, keeping supposedly long-term investments on exchanges is a worrying sign for some industry experts, hidden from savvy blockchain analysts and traders whether DWF sells tokens or uses them for market making purposes.
“It’s a red flag,” a founder, who asked to remain anonymous, of a crypto analytics firm with former market making experience told CoinDesk. “They [DWF Labs] market them as an investment, and then claim to do ‘market making’ so they can keep funds on exchanges and just dump.”
It’s hard to opine on where a firm like DWF should draw the line between VC and market making. Perhaps, a page from the TradFi banking playbook could work. In that realm, investment banking and trading/research is separated by a so-called Chinese wall. Where that line might need to be drawn for crypto investment firms is unclear.
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In the interview, Grachev admits his “biggest mistake” was not properly explaining his firm’s operating philosophy and investment process. “We need to be more open. I want [the community] to know how we work and then let people decide who is right and who is not right,” he said.
