Founded in 2017 by Al Moore and Phil Mochan, Koine offers segregated, institutional custody and settlement of digital assets, providing a transformative security model, eliminating settlement and counterparty risks.
Under the steer of CEO and Chairman Hugh Hughes, Koine brings together, for the first time, the full suite of governance, compliance, risk management and audit of real-time asset trading to the digital ecosystem; its institutional clients can engage with digital assets whilst fully adhering to regulated market practices.
Made up of experienced banking, capital markets and payments professionals, “Koine understands the need for an interoperable custody and settlement platform that significantly reduces counterparty and settlement risks for trading,” said Al, who heads up Koine’s business development. “Many firms focus purely on the tech, but it is absolutely essential we also have the industry know-how if we want to get major institutional investors on board.”
Which is exactly what Koine aims to do. Koine’s state-of-the-art platform has been engineered to provide clients with the tools to manage their assets in a low latency, high-volume environment and benefit from increased security, agility and efficiency.
“Koine delivers secure digital vaults to the same technical standard as the very best digital cold stores (FIPS 140-2/3) using its Digital Airlock 2122 technology,” said Phil, who heads up the firm’s strategy and corporate development. “This new approach, complying with the EAL7+ standard, the highest possible, eliminates the need for hot wallets and human participation in post-trade processes whilst enabling clients to retain instant access to their assets.”
It’s important for Koine to ensure they remain in-line with the robust regulatory structures from the traditional markets. Koine is authorised as an Electronic Money Institution (EMI) by the UK Financial Conduct Authority (FCA) for the issuance of electronic money with Firm Reference Number (FRN) 900934. This authorisation allows Koine to deliver settlement and segregated custody services for digital assets, plus settlement for digital assets v fiat money. And Koine is seeking further appropriate regulatory licenses in trusted jurisdictions, with the aim of providing its clientele with the most robustly regulated solution available for digital assets at a global level.
“Our ground-up architecture, team, governance and systems make it the solution of choice for the professional trading community, delivering a truly institutional service to support all trading styles, from passive holding to high-frequency trading and offering real-time gross and net settlement options. This means digital trading venues and fund managers are turning to us to provide independent, institutional custody and settlement of digital assets,” Phil added.
Over the past two years, Koine has partnered with a myriad of firms, both to add to Koine’s infrastructure, and to explore how the industry needs to evolve.
One of those firms is Ecstatus Capital, a London-based digital asset hedge fund established in 2018. The fund is managed by an experienced team of investment and technology professionals who specialise in the digital market. The firm’s primary aim is to take advantage of the volatility of Bitcoin and other major digital assets through a diverse portfolio of automated long and short trading algorithms. The fund has an FCA regulated investment manager, with Koine as its principal custodian. It is administered by Ifina and audited by Baker Tilly.
Phil recently collaborated with Ecstatus’ COO, Jonathan Hobbs, CFA, to discuss Bitcoin’s persistent robustness, the March price crash and whether Bitcoin can get past the risk committees of regulated investment firms.
The result of their conversation is summarised here:
What started in the last financial crisis as an elegantly explained concept on a whitepaper has emerged into the fastest growing asset class in history, now with over $100 billion in market cap and its own ecosystem of spot, futures and derivatives markets. Its future growth potential presents a compelling case for including it in institutional portfolios, but can the digital currency infiltrate current governance and compliance frameworks?
Bitcoin has appealing return characteristics. The Sharpe Ratio, which measures return per unit of risk, has on average been higher for Bitcoin over the last ten years than for any major asset class. This is despite several extreme sell offs along the way. Time and again Bitcoin has proven its resolve to bounce back as sentiment cycles swing from doomsday panic to irrational exuberance.
Bitcoin’s resilience was again proven in March. While the digital currency was by no means immune to COVID-19—closing the month down roughly twenty-five percent—it had at one point during March rallied over 85% off its sub-$4,000 low. Buying pressure stepped in here in a big way.
Where Bitcoin’s price goes next in the short term is anyone’s guess, but as the digital infrastructure continues to evolve Bitcoin and other cryptocurrencies would surely become more widely traded, with more new capital entering the space. Considering where we are on the Bitcoin product life cycle, there is still a significant opportunity for long-term growth. Compounding this with typically low correlations to other asset classes suggests that the return characteristics of Bitcoin are indeed appropriate for its inclusion in a balanced portfolio of traditional assets.
Market Structure Feasibility
If some amount of Bitcoin exposure can improve the performance of broader portfolios, then it really comes down to the practicalities of how to go about investing in a new market. How similar is investing in Bitcoin to investing in anything else? In some ways its quite different, although there are pockets of feasibility where the market structure is very similar. These include regulated fund structures, institutional grade custody and settlement solutions, fund administrators with enhanced KYC processes, futures and derivatives products, and OTC trading to facilitate larger orders.
Familiarity is Key
One of the simplest and most familiar ways for institutional investors to get exposure to the digital market is through a regulated digital fund. This allows traditional managers to bestow the responsibility of their digital asset investing onto the specialist digital fund manager.
The case put forward to the risk committee then becomes one of simple due diligence on the digital fund, rather than having to devise, test, approve and deploy a plethora of in-house processes for trading, securely storing and managing digital assets.
Traditional investment firms are taking their time to push the Bitcoin button. Perhaps more of this has to do with the red tape challenges of investing in a new market than the volatility of the cryptocurrency itself. Yet these two types of risks have gone hand in hand with Bitcoin’s meteoric price rise. This is often the case with any venture investment, in which the early investors stand to benefit more but are also exposed to more unknowns. Indeed, Bitcoin’s potential for high returns exists precisely because it has such risks. As the asset class and its infrastructure mature both its risks and future growth potential will likely taper off.
The decision on when to enter the digital market, and in what capacity, materialises once the potential growth opportunity outweighs all the possible risks. The timing of this will vary amongst different firms. Although by removing as much of the market structure-associated risks as possible, the decision becomes much more tilted towards how Bitcoin can improve portfolio performance than on governance and compliance.