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An institutional digital asset exchange and brokerage has become the first platform of its kind to enter the Financial Services Register at the UK's Financial Conduct Authority (FCA).
As FCA registrations go, obtaining approval for crypto-related activities can be a struggle, given the higher perceived risk of financial crime associated with the industry.
But in Zodia Markets’ case, its registration process was relatively swift, taking almost exactly one year from application to approval.
In so doing, Zodia Markets also carved out a new milestone for itself as the first bank-owned crypto-asset exchange and brokerage on the register.
As CEO Usman Ahmad told VIXIO, Zodia Markets is part-owned by SC Ventures and part-owned by BC Technology Group — two companies whose prior expertise guided the registration process.
SC Ventures is the fintech innovation arm of Standard Chartered Bank, while BC Technology Group is an Asia-facing digital asset firm and parent of OSL.
OSL was the world’s first and, currently, still only institutional digital asset exchange and brokerage to obtain a licence from the Hong Kong Securities and Futures Commission (SFC) in December 2020.
Zodia Markets can be seen as a “transplant” of OSL’s brokerage and exchange businesses to the Europe, Middle East and Africa (EMEA) region, said Ahmad, which the company sees as underserved for institutions that want to enter the digital asset markets.
Getting by with a little help from the bank
According to Ahmad, Zodia Markets' close ties to Standard Chartered and its understanding of banking industry controls helped it significantly in its FCA registration process.
It also helped that its sister company, Zodia Custody, pre-dated Zodia Markets and had already obtained FCA registration one year earlier.
As Ahmad pointed out, most institutions that enter the digital asset market — including Nomura, Fidelity, Citi, BNY Mellon and Standard Chartered itself — start off with custody.
Some such as Goldman Sachs and J.P. Morgan have also entered the crypto futures markets, but to date none have attempted to launch a trading platform and brokerage for the spot crypto markets.
“When we have spoken to these banks they have actually asked us: ‘How have you been able to do this?’,” said Ahmad.
“The simple answer is that neither we nor Standard Chartered could see anything that would stop us doing it.”
In the UK, although there are restrictions on banks holding digital assets directly, Zodia Markets’ business model provides a solution.
“Our business is segregated by design,” said Ahmad. “Custodians will manage the holding of assets on our behalf and on behalf of our clients.
“That will broadly be under standard client asset segregation rules, even though they don't necessarily apply in the crypto marketplace just yet — certainly not in the UK and not currently in Europe.”
According to Ahmad, other banks and bank-owned firms have expressed interest in building similar platforms to Zodia Markets, but have been put off by the uncertainty of the regulatory landscape.
This is especially true in the US, where the debate as to whether crypto-assets should be deemed securities, commodities or property assets continues, as covered by VIXIO in recent weeks.
Focus on AML
From Zodia Markets’ perspective, one advantage of setting up in the UK and Europe is that crypto-assets in these jurisdictions are currently under registration regimes built around anti-money laundering (AML) rules, which helps to simplify the terrain.
“Because we are part of Standard Chartered Bank, that's something that came with the territory for us,” said Ahmad.
“For a lot of those AML controls, we inherit the same governance, the same compliance and the same risk factors from Standard Chartered. The same goes for combating the financing of terrorism (CTF) controls.
“So in that regard, I think the FCA had a degree of assurance and comfort with us. While no bank is perfect — including Standard Chartered - the level of control and governance applied was clearly recognised.”
Michael Walsh, head of distribution at Zodia Markets, said the FCA demonstrated a “surprisingly good” understanding of the crypto-asset markets and the company’s application of AML/CTF controls.
“We made life easy for the FCA by demonstrating bank-standard governance — governance that was built for a bank of over 80,000 employees and over 9m clients,” he said.
“We are probably the only digital asset company that's able to demonstrate that same governance, and that definitely helped us with the FCA.”
Ireland approval, Europe launch
Following its launch in the UK, Zodia Markets’ next priority will be to launch in the EU.
The EU launch is subject to approval from the Central Bank of Ireland (CBI), which will be issued to Zodia Markets’ Irish entity headed by Walsh.
Ahmad said CBI approval is moving at a slower pace due to “forward-planning and future-proofing” requirements ahead of the Markets in Crypto-Assets Regulation, also known as MiCA.
In July, as reported by VIXIO, the European Parliament reached a provisional agreement on MiCA, which will be the first EU-wide regulatory framework for crypto-assets.
Under MiCA’s licence passporting rules, a crypto firm that obtains a licence in one EU jurisdiction will be able to offer its services in any EU jurisdiction.
When MiCA comes into force, which is likely to be in late 2023 or early 2024, Zodia Markets plans to be ready to serve the whole of the EU from its base in Ireland.
It is worth noting, however, that even with FCA registration alone, Zodia Markets can still serve clients anywhere in the world, but as Ahmad said, it has to be “cautious” about the country of its counterparties.
Banking on institutional adoption
Once up and running, Zodia Markets is hoping to capitalise on the wave of institutional adoption currently taking place in the crypto-asset markets.
Walsh pointed to the recent entry of BlackRock, the world’s largest investment management firm, as a leading indicator of the growing appetite for crypto-assets in the traditional finance world.
In July, BlackRock reported $8.5trn in assets under management (AUM), down from $10trn at the beginning of the year.
“We are looking at traditional institutions who are beginning to adopt digital assets,” said Walsh.
“By no means would we turn down a crypto-native business, but they would take a different approach to governance risk among their boards and investors.
“Whereas, if you are the product owner for let's say a digital asset fund within BlackRock, when you go to the board or your other stakeholders, you're far more likely to be happy with putting a bank-owned subsidiary in front of them.
“Given the governance and credit risks, and particularly given that we at Zodia Markets have been through multiple cycles in multiple asset classes.”
