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Citadel’s EDX Partners With Anchorage — Is Coinbase Under Threat?

Published August 23, 2023 3:22 PM
Teuta Franjkovic
Published August 23, 2023 3:22 PM
Key Takeaways
  • Anchorage Digital continues to be digital asset custodian for EDX Markets.
  • Regulators urge the separation of trading, market-making, and custody activities.
  • EDX concept closely resembles conventional financial methods.

EDX chose digital electronic asset exchange Anchorage Digital as its partner for digital asset custody. A consortium of organizations, including Citadel Securities, Fidelity Digital Assets, Schwab, Paradigm, Sequoia Capital, and Virtu Financial, co-founded EDX Markets last year.

Targeting brokers and other institutions, EDX started trading cryptocurrencies in June, stressing that it is a non-custodial product. Anchorage will offer custody to the clearing arm when EDX Clearing, which will serve as a central counterparty for settlement, launches later this year.

Bolstering Institutional Clearing Security and Compliance

“Anchorage Digital has a robust security, governance, risk, and compliance framework, which will provide a best-in-class solution to meet the needs of our institutional client base,” Jamil Nazarali, CEO of EDX, said .

Anchorage Digital Bank is “the right partner to promote EDX’s development of a strong and compliant clearinghouse company because it is the only federally chartered cryptocurrency bank in the US.”

In January 2021, the company became the first cryptocurrency firm to receive a national trust bank charter from the OCC even if, within a year, it found itself accused by the same regulatory body due to Anti-Money Laundering violations.

Subsequently, Binance.US, CoinList, Blockchain.com, Strix Leviathan, and Wintermute united with Anchorage Digital to establish a custody network.

Bear market compelled several crypto enterprises, Anchorage Digital included, to downsize their workforce. As of March this year, the company had to lay off 75 team members, equivalent to approximately 20% of its total workforce.

EDX’s CEO then affirmed  that the company is engaged in a collaboration with an external custodian, although the identity of this new partner remains undisclosed.

Drawing From TradFi Will Be Critical

In October 2022, EDX unveiled Paxos as its new custody partner. PayPal stablecoin PYUSD is issued by Paxos, a custodian with a New York State-issued license. The Office of the Comptroller of the Currency also granted it a conditional bank trust charter, although this has since expired.

Just before the end of Trump administration, Anchorage obtained its national charter the day before Brian Brooks’ resignation as an acting comptroller. However, during the Biden administration, not a single fintech, including crypto banks, has been granted a national charter.

In the meantime, venture capitalists have invested  close to $500 million in Anchorage Digital. At a $3 billion value, KKR led its $350 million Series D round in late 2021. Goldman Sachs, Andreessen Horowitz and PayPal Ventures were additional participants. Visa participated in a $40 million Series B investment, one of its first well-known backers, in 2019.

Diogo Mónica, Co-Founder and President of Anchorage Digital, stated : “Drawing from the blueprint of traditional finance will be critical to unlocking the next phase of institutional crypto.”

He added: “Anchorage Digital has proven that separating custody and exchange functions for institutions isn’t just possible, it’s essential. We are proud to provide custody infrastructure for forward-looking players like EDX Clearing as part of our continued efforts to advance a safer crypto market structure.”

Can This Harm Coinbase?

Despite having its initial public offering (IPO)  by the SEC in 2021, Coinbase, the largest cryptocurrency exchange in the US, is being sued for allegedly trading in “unregistered securities”. Even the American government sold a certain amount of Bitcoins on Coinbase.

The SEC decides which cryptocurrencies can be sold.

Be it as it may, four specific cryptocurrencies—Ethereum, Bitcoin, Litecoin, and Bitcoin Cash—were never subject to any legal action by the SEC. In a CNBC interview, SEC Chair Gary Gensler confirmed that these coins are in fact “not a security.”

Because of this, EDX Markets only intends to trade only four tokens, avoiding SEC legal scrutiny in the process.

Because the new exchange promotes a “non-custodial” approach in which it does not keep clients’ digital assets while trading, the custody arrangement with Anchorage is essential for EDX. In contrast, there are now operating cryptocurrency platforms like Coinbase Global Inc. and Binance Holdings Ltd.

Since the collapse of FTX and other prominent crypto platforms last year, which left investors who held their tokens at those venues suffering millions in losses, crypto has struggled to keep up with the rising demand for third-party custody providers.

Crypto exchanges have come under fire in the post-FTX environment for failing to keep custody, market-making, and trading operations distinct, which can lead to conflicts of interest and fund manipulation.

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