“An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.”
This definition from Investopedia explaining assets and their classification into tangible and intangible assets in the field of financial accounting has never been any more important. While tangible assets are associated with current assets like cash, inventory, land buildings, etc, intangible assets – which are non-physical resources – such as digital assets are seeing a newfound interest and momentum in the market.
Digital assets are a digital record or representation of all kinds of objects and their associated value. They are stored and tracked on a distributed ledger called a blockchain and allow for easy issuance and transfer of ownership without the need for paper documents.
The digital asset will undoubtedly have a place in the future of capital markets but its use right now as another market buzzword leads to apprehensions among retail investors, institutional investors, and financial service providers. For institutional investors though, D2X, an Amsterdam-based startup wants to make trading digital asset options and futures more accessible with an EU-regulated market infrastructure. CEO Theodore Rozencwajg explains how D2X is filling the fundamental lack of market infrastructure for digital assets at the institutional level in Europe.
Mathematics meets financial markets
Unlike most crypto enthusiasts and crypto traders, Rozencwajg does not nerd out but he does say that his background in mathematics and interest in quantitative topics piqued his interest in financial markets. He enjoys the technical aspect of certain products, such as derivatives, and sees their zero-sum game as an “interesting feature”.
When prodded on why, he quickly says “making mistakes can be costly but making good decisions can be very rewarding as well.”
While big macro components mean that investors need to stay on top of things at all times, Rozencwajg is drawn to the fact that financial markets have a wide range of professionals and fields, including but not limited to trading and risk management.
Theodore Rozencwajg then took up a few internships at banks before starting a job at Natixis, covering hedge funds and asset managers. This exposure to volatility trading, a sub-segment of derivatives, fascinated him and kick started his career.
“Derivatives started to fascinate me as soon as I started grasping the endless possibilities and opportunities they provide. Their customizable nature means you can implement all sorts of investment views and arbitrage strategies,” he says.
To further strengthen his knowledge in financial markets, Rozencwajg then did a Master’s in Financial Analysis from London Business School, which led him to All Options in Amsterdam and paved the way for the start of D2X.
D2X is born as a derivatives exchange for institutional crypto enthusiasts
The story of D2X originates from a chance encounter between Don van der Krogt and Theodore Rozencwajg at All Options. As derivatives traders, they had a lot in common but Don was also a crypto enthusiast, following the space for a number of years and even co-founded a cryptocurrency trading platform.
There was a lot in common between Theodore and Don and the latter’s interest in crypto meant that they soon began working on the derivative segment related to digital assets. The way Theodore narrates their conversation takes you straight to Pied Piper pitches seen on HBO’s hit show Silicon Valley.
“I know you’re really passionate about derivatives. So far, you’ve mainly been trading equity derivatives, but there is now a new asset class developing fast, and naturally, an exciting derivative segment” Don told Theodore. They began working on the idea and Theodore says immediately spotted a “business case from a market making standpoint.”
When Theodore and Don started trading these derivatives themselves, they observed the lack of market infrastructure at the institutional level for this new asset class, particularly in Europe. They realised that the demand was there but Theodore adds that they identified “lots of hurdles, both on the regulatory and the operational side of things.”
Theodore says that European financial institutions are showing strong interest in crypto derivatives but other factors such as “reputational risks” have slowed adoption. With D2X, Theodore and Don set about fixing these issues including the primary one – the absence of regulated market infrastructure for these derivatives. D2X, born with Laetitia Grimaud as General Counsel and co-founder, can be described as a pairing of entrepreneurial mindset, interest in crypto assets and derivatives, and lack of regulatory framework.
Launch timeline, focus on regulation and sufficient liquidity
D2X is not live yet and CEO Theodore Rozencwajg says they plan to go live during the fourth quarter of this year. They have applied for an MTF licence, a multilateral trading facility allowing it to offer its service in Europe. With thousands of cryptocurrencies out there, the D2X team is very clear about their focus on the institutional segment, which makes them different from those focusing on the retail segment. This means that D2X will list derivatives on underlying assets that are sufficiently liquid.
Theodore says they are looking at digital assets with significant institutional demand and hence, the initial focus will be Bitcoin and Ethereum. However, as the asset class develops, Theodore says that they are “already seeing more digital assets liquid enough to have their own listed derivatives.” Potential candidates include Luna and Solana, a public blockchain platform with smart contract functionality with native cryptocurrency SOL.
D2X as a platform will also cater mostly to traditional and “hybrid investors”, investors Theodore defines as those already trading both traditional asset classes and digital assets. For most investors, the challenge with digital assets has been the regulatory and operational front and D2X wants to solve these pain points with its derivatives platform.
“We focus mainly on the hybrid segment and the pure traditional finance players. The reason being that we spotted a huge gap between the traditional finance world and the ecosystem surrounding digital assets,” Theodore explains.
The existence of D2X will stem from regulatory actions from the European Commission. While countries like Germany and Switzerland have enacted their own rules for crypto assets, the MiCA (Markets in crypto-assets) regulation will make the rules truly pan-European. Rozencwajg tells Silicon Canals that the fragmentation surrounding regulation on digital assets is the “most problematic” for entrepreneurial ventures.
Right now, the crypto related licences are local in Europe, which means a Dutch exchange won’t be able to easily deal with a French investor and vice versa. With MiCA, it will be possible for an exchange to get a single licence and operate anywhere in Europe or as Theodore calls it “a passportable licence” for crypto assets.
Rozencwajg also greatly appreciates the positive stance taken by European leaders on digital assets, something not seen globally. “We think regulation is necessary and is healthy, for fair and orderly markets, for transparency, for institutions to really be able to adopt the asset class, and play on a level playing field where everyone knows the rules of the game,” Rozencwajg elaborates.
However, the passing of MiCA has not been straightforward and was voted against last week. This means that the European Commission will need to rewrite portions of the law before it gets adopted. Rozencwajg contends with the proposed ban of digital assets using “Proof-Of-Work” as consensus mechanism, such as Bitcoin, which in his view goes against the principle of “technology neutrality”.
AWS to power the real cloud-based exchange
During our chat, Rozencwajg repeatedly brings the notion of defying the traditional sense of an exchange and that extends to technology as well. He says a traditional exchange will typically rely on bare metal data centres to operate their services. They will either outsource this data centre operation or operate themselves at the beginning. Theodore and Don had the same operational model in mind as well before they spotted the opportunity to run an exchange on cloud.
For a trading exchange, the speed, agility, access, and reliable interface are the most important elements. In order to provide these essential elements, D2X decided to go with AWS since it presents a lot of these reliable features. Rozencwajg quickly points out that another feature working in favour of AWS is its low latency, which is extremely important in the field of trading and derivatives.
D2X is all about building a tech stack that will act as a benchmark for a derivatives exchange for digital assets that works anywhere in Europe and also adheres to all the regulatory framework. Theodore says that such a tech stack can definitely be built on a cloud platform like AWS which also focuses on tech stack and its integrity over everything else.
Milestones after milestones
D2X is a startup in true sense and having secured €5.3M in funding in less than a year, Rozencwajg says the focus is to hire a lot of exceptional people with specific skill sets. “I think the challenge of building an exchange is that you require expertise across lots of different work streams, whether it’s risk management, tech, regulation, meaning that we need people, we need lots of people,” he says.
The startup has 15 people in its team right now and aims to grow to 40 by the end of this year. D2X is also looking to recruit people across tech, compliance, and on the business development side. Rozencwajg has plans to hire sales people who can help bring its “market infrastructure in front of the institutions.”
For D2X, the immediate goal is to go live in the fourth quarter as a bridge between traditional finance and the digital asset ecosystem with focus on the institutional segment. However, in two to three years, D2X aims to be in a competitive position to capture most of the European flow for digital assets. D2X doesn’t want to limit itself to the digital asset class alone but instead, wants to be seen as a pioneer in financial innovation.
With the D2X Group name, Rozencwajg says, the company is looking at the full scope of market infrastructure and across geographies. This ambition also involves blockchain, the underlying technology. In five years time, D2X Group wants to lead in a space where institutional-grade market infrastructure does not exist yet and aims to do so in line with regulatory developments.
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