The mad, mad, mad world of Crypto On-boarding
Or: How exchanges inflict migraines on potential customers
Everyone agrees that the cryptocurrency market needs greater institutional participation, but, at the moment, the structure of the market isn’t making it easy for buy side clients. There are several barriers to entry, but one of the most intractable and persistent is the laborious on-boarding procedure new clients must undergo before they can start trading on an exchange.
Some exchanges are better than others, but none make it easy and at some on-boarding can take two or three months. It is time consuming, labour intensive and more often than not incredibly frustrating, so it is perhaps not surprising that a lot of would-be institutional players would rather not be bothered or give up in despair before the process has been completed.
Lists, lists, and more lists
For example, one exchange requires the following information to set up a corporate client:
a corporate address
of incorporation and business registration
the company memorandum and articles of association
details of ownership and structure of control
company bank statement with address
details of company minutes when exchange membership was discussed
an authorised signature list
a register of current members, beneficiaries and current officers
list of all shareholders who own 20% or more
a list of all company directors, with certificates of incumbency and good standing
The exchange also needs two forms of identification, proof of residence anda selfie (because…fintech), per individual.
This is by no means the complete list. Some exchanges are even more demanding, requiring, for example, the firm’s average monthly trading volume, total assets and the annual report. Some of this information may be readily at hand, but a great deal isn’t.
Exchanges also often change the goalposts during the on-boarding process, suddenly asking for arcane pieces of information that they hadn’t previously. Getting in touch with customer service, even if one is able to do this, to clear up any confusion about what is required very rarely adds any clarity to the procedure. Responses are not timely and, in the case of many exchanges, communication in English presents problems. OKeX, for example, is particularly hard to get hold of.
No two exchanges alike
The exchange world is notorious for its lack of uniformity. No two exchanges are alike. It is not as if having done it once with one exchange a client can open another account with a different exchange and expect to encounter a process that is similar. Heterogeneity is the name of the game.
In fairness to exchanges, most of them began life as investment venues for retail customers not institutional players. They are not set up for institutional accounts, and most seem to lack the manpower, bandwidth, and, perhaps, inclination to make it easier for the buy-side.
Moreover, exchanges are now required by regulators to fulfil a lot more KYC and AML protocols than was the case even a few years ago. Regulators have been upping the requirements and exchanges are simply responding to a changed playing field.
But there are other areas where their indifference to new business is quite mystifying. We at Copper, as an award-winning custodian, have two fundamental requirements of the exchanges with which we deal before all the on-boarding begins.
Whitelist, what whitelist?
Firstly, they must accept a whitelist of agreed email addresses, or wallets, which are verified before trading commences. This ensures funds cannot be sent anywhere else but only their correct destinations. Secondly, the exchange must provide an API key for trading, withdrawals, and read-only access.
This would seem fairly straightforward, but not every exchange is able to do it and not even every exchange among the core exchanges are able to do it. Huobi, for example, has only been able to provide whitelist functionality in the last couple of months.
Getting the whitelist onto the exchange is also a very lengthy business. The addresses have to be up-loaded manually, and for every different coin there is a different address. A client might have more than 20 different coin accounts, and each one of these has to be uploaded separately and individually to each exchange on which he or she wishes to deal.
In addition, a description and two-factor authentication (2FA) needs to be provided for each wallet address on the whitelist. There can be as many as 2,000 different but specific manual uploads for each new client. We’ve sometimes given exchanges a list and said ‘Please can you upload this?’ Not one has.
All too much for most asset managers
One can easily see how this is too much for the average institutional client. For these reasons we are doing it all for every new client that signs with us. According to Michael Hall, chief investment officer for Nickel, a new London-based crypto hedge fund,
“By opening accounts at nine exchanges for our fund, Copper has saved us countless hours and mountains of paperwork that we would have wasted while navigating the labyrinthine account opening processes of the digital asset exchanges on which we trade.”
Nickel was launched on June 1 2019, and has over $25m assets under management so far. Its clients include European funds of funds and high net worth individuals. It intends to trade on an increasing number of exchanges as it is an arbitrage-based fund rather than long-only.
There are other reasons why clients like Nickel are drawn to Copper, of course. Our unique Walled Garden approach means that when funds leave the vault they can only move within a prescribed trading ecosystem.
This is a discussion for another day, however. Suffice to say that the painful and vastly time consuming on-boarding process in operation at all exchanges serves as a significant deterrent to greater participation in the crypto market by institutional clients.
True, the process is so off-putting that it might bring more clients to our door than would otherwise be the case, but by inhibiting client involvement it damages the overall liquidity and market-making capacity of the crypto-currency sector. And this is not what any of us want to see.