AlphaWeek Q&A: Benjamin Dives, CEO, London Block Exchange
AlphaWeek’s Greg Winterton discussed the current state of the digital currency exchange industry with Benjamin Dives, CEO, London Block Exchange.
GW: Benjamin, thanks for taking the time. For crypto fund of funds and family offices which allocate to crypto hedge funds, risk management is a large part of that process. What are crypto exchanges like LBX doing to improve their security processes to minimise the risk of the exchange being hacked?
BD: In order to be taken seriously within the financial industry, crypto exchanges need to be proactive in aligning with the highest possible security and compliance standards. At LBX, for example, we obtained, with a partner, cover under an e-Money license from the FCA early on, providing full regulation for the holding of client money, the issuing of electronic money, and ensuring it is safeguarded in an appropriate manner.
Just like the banks, exchanges must have a rigorous transaction verification process in place; this includes mobile phone, password, e-mail and 2 factor authentication. Furthermore, having a transaction dispute process that customers can go through in the unlikely event that they need to will also help exchanges ensure that they have a high level of transparency and openness for their clients.
Selecting solid, proven security partners is a must. At LBX, we have engaged two enterprise level managed security firms - Rackspace and Akamai - who are both highly regarded in their respective fields for server build, protection and monitoring, and online data security. They are our first line of defence and constantly patch and update all of our technology to keep pace with the constantly changing attack vectors being developed all around the world.
GW: On the same theme, tell us more about LBX’s due diligence process with regards to selecting which cryptocurrencies to admit to trading on its exchange.
BD: We are proud to have a team of market analysts and strategists whom are some of the best in the business. Having joined us from institutional backgrounds, they approach each new currency like they would any investment, with careful consideration and background research.
When it comes to choosing the currencies that we offer on our exchange, we look at a number of variables, the most important being the technology behind it, the people and communities backing it, the problem it’s solving, and the governance. We also generally try to avoid the likes of anonymous cryptocurrencies, also known as Privacy Coins, that could be a cause for concern as they can possess no traceable properties and as such could be used for illegitimate means such as circumventing sanction controls.
GW: Crypto hedge funds are more likely to use your OTC services than trade on your exchange. How long will it be until exchanges like LBX are working as fluidly – or almost as fluidly – as the equity exchanges?
BD: We need both a little more volume (although we’re getting there) combined with the fully fledged desktop offering. We’re close on both counts. I would suggest that there are a number of exchanges globally who could already be described as being highly fluid with hundreds of thousands, if not millions of users participating in global 24/7 marketplaces with no timezone limitations on opening hours and connected via any web browser. With regard to volume, many crypto exchanges are already exceeding the daily trade volume of the LSE and NYSE.
GW: Despite the nay-sayers, digital currency is moving more and more into the mainstream, with the NYSE looking to launch a Bitcoin trading platform and Goldman Sachs recently announcing a digital currency trading desk. Do you expect this to be the beginning of an avalanche, or will these firms’ peers play the wait-and-see game?
BD: Whether people like it or not, cryptocurrency is well and truly past being a niche subject – Bitcoin is an officially recognised means of payment in Japan, and has even been used to help mitigate the effects of hyperinflation in countries like Venezuela, for example. While plans by the NYSE and Goldman Sachs will help in shifting public perception and acceptance of cryptocurrencies in the more traditional financial sector, these moves are actually quite late to the party in comparison to other parts of the world. The institutional sector is starting to realise that they cannot ignore cryptocurrency and are slowly starting to react, so it will be interesting to see how the next few months unfold.
GW: All major jurisdictions are paying increasing attention to digital currencies from a regulatory standpoint. From the perspective of an institutional investor, that’s got to be a good thing, right?
BD: Absolutely. We welcome greater regulation as we ultimately want a safer and more grown up marketplace. Trust issues currently limit the size of the cryptocurrencies industry. Any additional regulation should broaden the appeal of the crypto-space to a far wider audience, from small retail investors all the way up to large institutional investors and wealth funds. This is a contrary viewpoint to the established financial community who generally believe that any increased regulation will limit the growth of a marketplace.