Hidden Road Partners is in talks with hedge funds and many of the top 20 global banks about providing access to trade or hedging their crypto risks, Bloomberg reported citing executives at the firm.
Hidden Road Partners is a prime brokerage focusing on digital assets and foreign exchange.
Last month, Hidden Road Partners completed a $50 million funding round last month that included Citadel Securities, as well as the investment arms of cryptocurrency exchanges FTX Trading Ltd. and Coinbase Global Inc.
This move by the prime brokerage startup is being seen to ease Wall Street’s entry into crypto trading by tackling counterparty risks and conflicts of interest.
Managing counterparty risk has come at a critical time as the recent crypto downturn has led to the default of influential crypto hedge fund Three Arrows Capital (3AC) and crypto lenders and brokers such as Celsius Network Ltd. and Voyager Digital Ltd. filed for bankruptcy protection.
“Such credit risks could hamper traditional funds’ interests in trading directly with cryptocurrency firms,” Bloomberg said.
Ramnik Arora, a general partner at FTX’s venture arms, said, “the recent episode with crypto lenders has made it abundantly clear that the industry is in need of better real-time credit risk management.”
“Hidden Road is making it easier for risk-conscious borrowers to access credit markets, reducing systemic risk for the ecosystem.”
The startup was founded in 2018 by Marc Asch, formerly with Steven Cohen’s hedge fund SAC Capital and Point72 Asset Management. Hidden Road initially started with foreign-exchange services and expanded into digital assets in October.
The company allows banks or other institutions to post dollars as collateral in a “tri-party” set up with a custodian and receive profits and losses in dollars. However, this is only limited to those banks or institutions that cannot hold digital assets directly.
Clients can trade with exchanges as well as liquidity providers, including Virtu Financial Inc., Optiver BV and Wintermute Trading Ltd.
There is an increasing number of crypto platforms and brokers vying for institutional traders. But Hidden Road claims that, unlike many others, its pure-play structure would eliminate potential conflict of interests.
“The firm takes on counterparty risks on behalf of the client and the crypto exchange or market maker. If a counterparty defaults, the startup would be on the hook for completing the defaulted side of the trade. In exchange, Hidden Road’s prime-brokerage fee incorporates this aspect of credit risk,” Bloomberg said.
The business model for Hidden Road does not include carrying a huge balance sheet to lend to its clients; instead, the firm raises capital from investors such as pension funds and pays them a return on capital. It generates returns by providing financing to clients for their trading activities.
The company’s risk mitigation involves using a real-time system, which sets risk limits and requires portions of collateral upfront.
Hidden Road said it plans to enter futures and options clearing.
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