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Saturday, 25 May 2024

Crypto needs a Globally Consistent Regulatory Framework and Proper Infrastructure – CEO of BCB Group

Oliver von Landsberg-Sadie’s financial career began as a quant engineer where he served in different investment banks in the credit derivative space notably Barclays Capital and Lehman Brothers.

“I was there in the run-up to the subprime crisis, which is really a horrible part of financial history, but post 2008 my role involved some of the clean-up in the the aftermath of the crash, valuing legacy structured credit positions, then working in valuation control to help keep the pricing of those old trades in line with what little there was left in external price benchmarks. It involved looking at market risk, stress scenarios and restructuring. In addition to my MBA, this lived experience gave me the confidence to become a founder.

“In fact, it wasn’t my original ambition to solve the bank account problem for the crypto industry – I was just looking to provide a credible crypto brokerage service for high-net-worth individual investors, people who knew what they were doing but didn’t want to do the technical heavy lifting specific to crypto.”

The result is BCB Group, Europe’s leading payment service provider for the digital asset economy and the first UK regulated payments institution dedicated to crypto and blockchain.

While von Landsberg-Sadie’s ambitions were limited in the beginning and they relied on banking partners NatWest bank in 2018 to provide accounts for trade settlement, the UK bank changed its mind virtually overnight, giving von Landsberg-Sadie 90 days to find a new banking solution.

“In just 90 days, instead of merely seeking another banking partner, my co-founder Oliver Tonkin and I figured out how to provide the basic banking infrastructure for ourselves and our trading counterparties by obtaining a payments licence.”

von Landsberg-Sadie’s experience as a quant engineer and working through the crash greatly assisted him in setting up the technical aspects of the business including the web app and API.

“But it snowballed very quickly as we stumbled upon the thing that the market needed way more than crypto liquidity, which was a way to move money in a regulated and credible way. So, while this was the result of a strategic pivot, our platform has become systemically important in the crypto industry.”

BCB Group’s primary service moved from OTC trading to payment accounts, or to use another term, to providing crypto ‘bank accounts’ where the holder of the account has the usual sort code and account number setup – or IBAN in the case of some currencies – and can move money in and out in the crypto industry exclusively.

Moving from TradFi into crypto posed some very serious challenges for the fledgling bank. Within TradeFi the regulations governing financial institutions are very well defined and moreover consistent across different jurisdictions. These rules have had decades to be refined and are mature in their current forms.

Crypto on the other hand is barely 12 years old and is only in recent years gathering the attention of regulators, but there are important discrepancies between them, especially where crypto assets are described and categorised, and where they fall in or out of scope of the definitions of securities.

“Progress is being made but slowly and there is a lot of disconnect across regions. So, the first big challenge in this space is some sort of globally consistent regulatory framework.”

The second biggest challenge is the infrastructure.

“There is still a lot of scepticism and cynicism about the industry which is one of the main reasons some large institutions haven’t really engaged as yet. They don’t have the time or the risk appetite, and have little incentive to engage at the expense of already profitable activities in traditional asset classes.

“It’s a risk issue and a massive education curve.”

The third challenge is the volatility of the marketplace where the ecosystem and the individual assets are all over the place. Funnily enough, over the past 12 months Bitcoin has been a counterexample where it’s been mostly horizontal while the rest of the world’s digital assets and traditional assets have been going up and down.

“With regard to the volatility, I can see a platform like Bumper providing a critical service. Let me explain from my perspective. BCB’s job is to provide durable infrastructure for the crypto economy. Number one requirement, medium term, is payment rails, but beyond that it is to offer tools that can manage risk, including price volatility. There is a growing number of platforms set up to manage market risk, through options for example.

“But many of these are pretty much copy and paste solutions from TradFi and they don’t always translate that well – instruments such as crypto options, futures, and other leveraged derivative instruments are flawed, with assumptions that arose from the specific ways that TradFi takes a directional view, hedges it, margins it, settles it, clears it and accounts for it.”

von Landsberg-Sadie argues that large institutions like a hedge fund or a bank can’t take on a large crypto position without the instruments to risk-manage it.

“What the market needs is a crypto native solution with a fresh approach, rather than a copy and paste solution.

In TradFi, derivatives pricing leans heavily on the Black Scholes options model and, within it, the Monte Carlo process to simulate randomness. But these models derived from an industry that had designated physical moving parts like a clearing house, a bank, a centralised exchange, and back in the day, traders in brightly colored, striped jackets, open shouting at each other across a trading floor – and for that conventional setup it largely worked. The model priced in the frictions and costs inherent in this physical system.

“But in crypto, we have an entirely different market, one that doesn’t need a central marketplace or a clearing house. And it is accessible to everyone, not just institutions, making accessible risk management even more critical. So, it is reasonable to think that solving the risk management problem needs a different approach.

“When Jonathan (DeCarteret, founder of Bumper) first showed me the white paper I was very impressed and thought a Black-Scholes pricing alternative is a bold move, but this works. It has taken out assumptions that are irrelevant to the crypto industry and added in assumptions that are.

“For example, Bumper also takes into account protocol risk where hackers are constantly looking for opportunities to exploit the protocol and run away with millions in crypto. This happens all the time in the constant arms race between crypto innovators and crypto criminals. Bumper manages this particular risk in the way it ensures solvency, for example. It can mitigate the kind of DeFi attack that simulates a rapid price move (gap risk) to yank premiums or margins out of kilter, which could liquidate large positions or bankrupt the entire protocol.

“And that is part of the genius of Bumper – it’s a crypto native solution.”

Jillian Godsil
Blockchain Advocate, Founder, Conference Chair, Women in Blockchain Advocate, Keynote Speaker, Crypto Journalist, Broadcaster, CEO, Writer, Homelessness Advocate, Former European Parliament Candidate, Law Changer, Mother, Choir Member, Hill Walker, Dreamer

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