EDX Markets, a non-custodial exchange, has officially launched. The term “non-custodial exchange” may seem paradoxical, but it’s a concept that EDX has managed to bring to life, marking a significant shift in the crypto trading landscape.
EDX Markets, which was established in 2022, is backed by some of the most prominent names in the financial industry, including Citadel Securities, Fidelity Investments, Charles Schwab, and Virtu, among others. Since its inception, EDX has facilitated trading in Bitcoin, Ethereum, Litecoin, and Bitcoin Cash, operating a marketplace that allows firms to negotiate prices and execute trades.
The exchange’s role is akin to that of traditional exchanges like NASDAQ or NYSE, with one critical distinction: EDX does not handle customer assets directly. This approach mitigates certain types of custodial risks, a significant advantage in the volatile world of cryptocurrency trading.
The non-custodial aspect of EDX refers to its unique settlement process. Unlike traditional exchanges that require customers to deposit assets into wallets controlled by the exchange, EDX plans to use third-party banks and a crypto custodian to hold customer assets. The actual exchange of assets happens directly between the firms involved, resolving the seeming contradiction of a ‘non-custodial exchange’.
EDX has plans to streamline settlement with the introduction of a clearinghouse later this year. Interestingly, EDX has not explicitly stated that it seeks to operate as an Alternative Trading System (ATS), and no filing for this has been found on Edgar.
The backers behind EDX are noteworthy. Schwab and Fidelity are the largest consumer retail brokers in the United States, while Citadel and Virtu are leading electronic market makers. Notably absent are Nasdaq, NYSE, ICE, or the legacy investment banks as investors.
Citadel and Virtu, relative newcomers to Wall Street, have business models that use technology to upend traditional over-the-counter market making desks. In 2018, Citadel rolled out a Central Limit Order Book (CLOB) for Treasuries, a significant development in fixed income trading. This move was seen as disruptive, introducing a new trading paradigm in a market dominated by large banks.
EDX avoids directly serving retail investors, catering instead to institutions by providing API-based trading access rather than a traditional front-end user interface. This approach suggests that EDX may have aspirations to evolve into a Regulated ATS and ultimately a ‘National Securities Exchange’, a move that would be beneficial for the crypto markets.
In the longer term, EDX might aim to disrupt fixed income markets using crypto rails, revisiting Citadel’s CLOB ambition. While EDX has not stated this ambition, the inclusion of Schwab and Fidelity implies significant potential for expansion.
EDX’s approach reflects the current regulatory framework, not the EDX initiative itself. By utilizing third-party banks and crypto custodians for asset custody, EDX minimizes conflicts of interest and protects against asset misuse, applying federal securities laws to crypto.
EDX is one path forward that is constructive for the sector. Another path remains a decentralized prime brokerage model, a heavy lift but a potentially transformative development for the industry.
In conclusion, the launch of EDX Markets marks a significant milestone in the evolution of cryptocurrency trading. The exchange’s non-custodial approach, backed by some of the biggest names in finance, could set a new standard for the industry, offering a more secure and efficient trading experience. As EDX continues to grow and evolve, it will be fascinating to see how it shapes the future of crypto trading.
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