Original title: "Backed by the Wall Street consortium, who exactly is the crypto trading platform EDX Markets?"

Author: 0xmin, TechFlow

As the U.S. SEC's regulatory storm swept the crypto world, an exchange update attracted everyone's attention.

EDX Markets, a new cryptocurrency trading platform backed by Wall Street forces such as Citadel Securities, Fidelity Investments and Charles Schwab, has begun executing transactions in recent weeks and is expected to be announced later on Tuesday local time. It has also received financing from Sequoia Capital, Paradigm and Virtu Financial, and is dedicated to serving institutional investors. It will provide trading in four cryptocurrencies: Bitcoin, Ethereum, Litecoin and Bitcoin Cash. Currently, these assets have not been identified as securities by the US SEC.

Compared with the previous news that the two major cryptocurrency exchanges Binance and Coinbase were caught by the SEC, many people speculated: Is the SEC trying to clear obstacles and pave the way for Wall Street's own crypto trading platform?

Who exactly is EDX Markets?

In a sense, EDX Markets is indeed a good kid that will be liked by the SEC and Wall Street.

Unlike traditional cryptocurrency exchanges such as Binance and Coinbase, EDX Markets adopts a non-custodial model and does not hold customers' digital assets during transactions, thereby mitigating custody risks. EDX Markets mainly facilitates the matching of buy and sell orders, similar to the role of traditional exchanges such as Nasdaq or New York Stock Exchange.

EDX Markets CEO Jamil Nazarali said it will work with third-party custodians. It also plans to launch a clearing agency, EDX Clearing, later this year to settle trades on the EDX Markets platform.

Previously, SEC Chairman Gary Gensler instructed that cryptocurrency exchanges, like traditional assets, must comply with securities laws, and pointed out that cryptocurrency exchanges mix multiple functions, and in the traditional financial field, the New York Stock Exchange does not make markets like hedge funds. In other words, he believes that the current exchanges are too large, combining trading, market making, and custody.

It seems that EDX Markets aims to solve this problem criticized by regulators by stripping away the market making and custody functions and turning it into a pure trading platform, similar to Nasdaq in the crypto world.

Nazarali seemed to agree with Gary Gensler's instructions, saying, "Regulators expect cryptocurrency exchanges not to function as broker-dealers, as is the case with traditional financial market structures, which creates an opportunity for EDX. Cryptocurrency is here to stay, but for it to develop as an asset class, it will need to adopt the regulations and investor protections of the traditional financial sector, which gives EDX more room to grow."

The second feature is that EDX Markets is an institutional trading platform that avoids serving retail investors directly. They provide API-based trading access rather than a traditional front-end user interface.

It is worth mentioning that there are Wall Street consortiums behind EDX Markets.

Schwab/Fidelity is the largest retail securities broker in the U.S. Citadel and Virtu are the top market makers on Wall Street.

I consulted Miss Zhang, a fellow villager who works as a cleaner on Wall Street. She told me that there are both new and old forces on Wall Street.

Old forces: Traditional Wall Street investment banks represented by Morgan Stanley and Goldman Sachs benefit from the opaque B/C bid-ask spread and prefer opaque over-the-counter transactions.

New faction: It is composed of institutions such as Knight Capital, Citadel, DRW, WorldQuant, etc. They started with a large investment in technology, speed and talent, and are also younger. For example, Robinhood’s order flow payment partner is Citadel, and RobinHood is a competitor of traditional Wall Street brokerage firms.

The fight between the two factions is akin to the battle between big banks and big tech, which have advantages over regulation and technology, respectively.

For example, in 2018, market maker Citadel launched the CLOB (Central Limit Order Book) for Treasury bonds. Old-fashioned fixed income trading desks benefited from opacity (over-the-counter, non-electronic trading, no best bid/best offer, no order book), and CLOB made fixed income a transparent market, which undoubtedly challenged the traditional market dominated by large banks.

At this point, the future development path of EDX Markets seems to become clear: to provide a highly transparent market, meet regulatory compliance requirements and only do non-custodial transaction matching to serve institutional investors.

EDX Markets is an attempt by new forces on Wall Street to replicate the traditional financial market structure in the crypto world to meet regulatory requirements and has the potential to develop into a small and alternative crypto Nasdaq.

From a positive perspective, it provides a seemingly compliant channel for traditional funds to enter the market, but on the other hand, it is not sexy and is not the "future exchange" that the crypto world expects. It will be worth looking forward to what happens next.