According to people familiar with the situation, EDX Markets, a recently established cryptocurrency exchange backed by companies like Citadel Securities, Fidelity Digital Assets, and Charles Schwab Corp., has abandoned its plan to use Paxos as a custodian in favor of final negotiations with Anchorage Digital about a new partnership.
The said agreement between EDX Markets and Paxos, a blockchain firm famous for producing a stablecoin with the Binance brand, is no longer in effect, the sources claimed. This collaboration, which was made public in October , would have given Paxos users direct access to EDX while directing the exchange’s clients to Paxos for custody of their cryptocurrency assets.
The previously announced partnership was in fact, a little surreal in the first place. Since EDX presented its business as “the new ramp for institutional investors to get “safe” Bitcoin exposure,” the fact of using Paxos for custody coincides with the fact that Paxos uses their ItBit exchange that has unlisted Bitcoin holdings (backed by fiat).
Also, in February, a New York state regulator ordered Paxos to stop issuing BUSD , a stablecoin with the Binance brand, in February. The US Securities and Exchange Commission also sent it a Wells notice, stating that it was considering taking legal action against Paxos for allegedly failing to register with the agency and misrepresenting that BUSD was a security. According to Paxos, it disagrees and is ready to sue if necessary.
The Pax Dollar stablecoin is also issued by Paxos. It offers blockchain solutions for business clients to tokenize, hold, trade, and settle assets.
However, it seems the new exchange decided not to act as a custodian of customer funds itself in order to avoid a conflict of interest — and a hot-button issue with the SEC.
In response to a question regarding the altered partnership, a representative for New York-based Paxos stated that “EDX moved to focus on a non-custodial offering at launch. We are really pleased about what EDX is doing, and when banks and brokers join the platform, we hope to help EDX customers with our regulated custody”.
Finding a custody partner is essential to the success of EDX since it promotes a “non-custodial” model, which means that it does not hold clients’ digital assets while they are trading. This sets it apart from other cryptocurrency platforms like Coinbase Global Inc. and Binance Holdings Ltd.
On the other hand, and with regards to regulations, the Office of the Comptroller had difficulties with Anchorage Digital as well.
In January 2021, Anchorage Digital became the first cryptocurrency company to be granted a national trust bank charter by the OCC. A year later, it was in trouble with that regulator for Anti-Money Laundering violations and consented to a court order.
Shortly after, Binance.US, CoinList, Blockchain.com, Strix Leviathan, and Wintermute joined forces with Anchorage Digital to build a custody network.
The bear market forced numerous crypto companies, including Anchorage Digital, to fire employees. In March of this year, it let off 75 team members, or around 20% of the entire workforce.
Jamil Nazarali, the chief executive officer of EDX, recently confirmed that the company is collaborating with a third-party custodian but withheld the identity of the new partner.
Currently, the exchange only accepts Bitcoin, Ether, Litecoin, and Bitcoin Cash as payment methods.
EDX Clearing, a clearinghouse that will use a central counterparty to settle trades performed on the EDX Markets platform, will be introduced in April with pros such as improved price competition, lower settlement risks, and higher operational efficiencies.
Strategic investors, such as Miami International Holdings, DV Crypto, GTS, GSR Markets LTD, and HRT Technology, joined the original group of founding investors and contributed further funds to EDX.
SEC Chair Gary Gensler has long criticized current crypto platforms for failing to keep custody, market-making, and trading separately from other aspects of their companies, which might lead to conflicts of interest.
In May, SEC suggested a new rule requiring investment firms to store all of their clients’ assets, including cryptocurrency, with licensed custodians. According to the securities regulator, just much everything the companies are in charge of should fall within the enlarged requirement for how registered investment advisers manage customer assets.
Although the February proposal specifically included cryptocurrencies, it also included other assets, which generated vociferous criticism from groups who aren’t generally on the same side as the crypto industry, including financial behemoths JPMorgan and the Small Business Administration (SBA).
The rule, according to SEC Chair Gary Gensler, “would help ensure that advisers do not inappropriately use, lose, or abuse investors’ assets,” but he was keen to point out that cryptocurrency platforms, which now have custody of investors’ assets, don’t meet the bill.
According to the general operation of crypto platforms, “investment advisers cannot rely on them as qualified custodians,” Gensler claimed, implying that the law would essentially remove the financial companies from the cryptocurrency sector.