Today I’m having a conversation with Pam Draper and Shane Thomson of Bitvo.

The discussion is around institutional trading at a crypto asset trading platform.

In this interview, we cover how institutional crypto is similar and different from traditional finance, the advantages of financial experience in an entrepreneurial environment and regulation. We will also delve into what will drive adoption amongst large institutional asset managers from the traditional financial sector.

Pam Draper is the President and CEO of Bitvo. Her background includes 14 years of Corporate Investment Banking at BMO and CIBC. She is a graduate of the Richard Ivey School of Business at Western.

Shane Thomson is the Head of Cryptocurrency Trading at Bitvo. Shane was a Corporate Foreign Exchange Trader at Cambridge Global Payments, an Energy Trader for Capital Power Corp and an equity research associate at TD Securities. He is a graduate of the Haskayne School of Business at the University of Calgary and is a CFA charter holder.

Bitvo is a cryptocurrency trading platform founded by experienced Canadian financial entrepreneurs. Bitvo offers a state of the art trading platform, proprietary air-gapped cold storage security, the Bitvo Cash Card and the Bitvo Same Day Guarantee.

Tristram Waye: So why don’t we start by having you both tell me a little bit about your backgrounds?

Pam Draper: Prior to becoming the President and CEO of Bitvo, a Canadian cryptocurrency trading platform, I started my career in corporate and investment banking, first at CIBC for six years and then at the BMO for almost 8 years. I left investment banking to become an entrepreneur at the soon to be founded Bitvo in early 2018.

Shane Thomson: I went to school at the University of Calgary Haskayne School of Business, where I obtained a finance degree. I earned my CFA after that. My career began at TD Securities in equity research. I then moved to power trading, followed by foreign exchange trading. Pam reached out to me through contacts she had in the foreign exchange world to see if I’d be interested in heading up the trading desk for a Bitvo. And after talking to her and seeing the growth potential in crypto, I joined her at Bitvo in 2018.

Now, I understand you have a strategic relationship with DC Bank, which is run by Jeff Smith, a serial financial entrepreneur. How did you meet him?

Pam: I met Jeff Smith when he was founder and CEO of DirectCash Payments and DC Bank. We did a lot of investment banking work together. Eventually DirectCash Payments, a public company, was sold and Jeff continued on to run DC Bank.

Based on our business dealings together, he asked me to come to Calgary and work on his next fintech startup idea. He wanted to develop a cryptocurrency exchange that was more secure, reliable and provided faster access to fiat than existing exchanges. That was the idea behind Bitvo.

I had worked with Jeff a long time and was excited by this emerging industry. So I agreed to join him.

How did the idea behind Bitvo evolve? When did you get started?

Pam: We decided to build this business by taking a different approach to the space than taken by others. We drew on our backgrounds in traditional financial services and expertise in fintech payment processing to develop our version of next-generation finance.

We wanted to build a business combining entrepreneurial drive and experience from fintech, and adding to that the professionalism, reliability and security that the best people in finance adhere to. Our strategic relationship with DC Bank added another unique layer to our offer.

I agreed to join Jeff pretty much New Year’s Eve 2017. During the first six months of 2018, I moved to Calgary and worked with our team to build the platform. We did our soft launch in June of 2018 followed by a full launch to the public on August 1 of 2018.

With a year under our belt, our operations have been ramping up every month. We’re very pleased with the progress that we’ve made so far, and look forward to the rapidly changing environment in the space.

That’s great to hear. Let’s talk about institutional investors in the crypto market. What is an institutional investor in crypto?

Pam: Right now, when we refer to in institutions, it’s either crypto corporations or high volume crypto traders in the space. These institutions can be Bitcoin mining companies, crypto brokerage firms that trade crypto on others behalf. They can also be crypto funds that are plugged into a bunch of different exchanges running trading strategies across different crypto exchanges across the world.

Shane: High volume traders are sophisticated traders who have substantial resources and trade more frequently than the average retail trader.

How important is the crypto-focused institutional participant in this market?

Shane: They are definitely the backbone of the system. Some of the players have been working in space for quite a while, including various miners and investors. Having said that, this group is small relative to all the institutional money out there. But interest continues to grow, and with the growth in interest will come the maturing of this market.

Outside of crypto-based businesses, what if any involvement does the more traditional institutional investor play in this market?

Pam: Large traditional financial institutions are not yet directly involved the crypto space in a material way. Certainly not the largest traditional finance entities. They’re not holding crypto assets.

Where we see the future of our institutional business is the eventual involvement of these traditional asset managers. Our institutional approach is designed to provide service to both the newer crypto institutions and the more traditional financial institutions. We see this as a huge opportunity. And we have the kind of institutional experience and knowledge that these asset managers expect.

If you think about the amount of money that the traditional financial sector controls and the fact that they have virtually no exposure to the space, even half a percent of their total AUM into the crypto space would be substantial.

They have no exposure?

Pam: There are institutions like Fidelity that have what I would call indirect exposure. Fidelity has been very public about making various investments in the space. They are building a digital assets custodial business. They have been buying exposure to crypto through investments in various other crypto businesses. But it’s indirect because they don’t actively trade the crypto assets. They don’t actively trade any Bitcoin or have a position in Ether, for example.

What are the factors that have been holding back the traditional financial institutions from joining the crypto market?

Shane: From my vantage point, it seems to come down to two major things. One is the understanding of crypto. The other is trust.

Back when I traded energy and forex, I was aware of Bitcoin but didn’t understand why it was important. When you are used to markets with rich and well-established fundamentals, it takes some time to wrap your mind around something like this. This is the process many are working their way through. So I think this barrier is now slowly eroding.

A second barrier is trust. This barrier will be addressed as government regulation comes out, and as insurance products are developed and are more readily available. We see these as key to more traditional financial institutions having a higher degree of comfort with crypto.

In the meantime, at Bitvo, we are addressing this trust gap by making sure our support team is known, available and accessible. The personal part of the financial business is key at many levels. The personal trust factor goes up exponentially as the amounts of money involved increases. So we have made customer communication and responsiveness a core principle of our business.

Pam: All asset managers in traditional finance have rules that govern what they can and cannot be invested in. One of the overarching themes for most if not all of these investors is a professional level custody solution like the one that Fidelity Digital Assets is building.

Other than Fidelity, there’s no one currently developing this key solution on a large scale other than maybe Bakkt. And traditional institutions tend to be very risk-averse when it comes to things like this. So before they would be willing to commit resources, a proven custodial solution that meets some level of regulatory standard needs to be available.
Then there is the insurability of crypto assets in custody as Shane said. The insurance market for crypto assets is still very new and in the development process.

Another issue is market depth or liquidity. These markets are growing, and liquidity is getting better every day. But we’re only just getting to a level of custody, insurance and liquidity where it’s starting to look more attractive to the traditional institutions.

One big challenge has been the very public negativity surrounding crypto at times. Negative headlines have created a big problem for investors and managers with fiduciary responsibility. That being said, many financial innovations have to deal with problems like these when they are relatively new.

However as the whole industry grows and evolves, and as professional standards are established, I think it’ll be easier for them to get their heads around it.

So what is an institutional desk in the context of the crypto trading platform?

Pam: For our business at Bitvo, the institutional desk does two things. One is that it is a source of liquidity for large orders. Which means we specialize in high volume and value orders. These orders range from $50,000 into the millions of dollars.

The second aspect is focused on service that can include order handling, block sourcing, and advice on order completion strategies. Managing large orders can be complex and getting great executions with size can be difficult in crypto markets.

After the transaction is completed and reported, we make sure that the institution’s coins get delivered directly to their wallet as fast as possible. Sellers have the proceeds of the transaction deposited to their bank account as soon as possible. This is where our payments expertise delivers.

The entire transaction process for institutions is designed to be high touch on our side.

What are the key differences, if any, between a traditional institutional desk compared to your crypto institutional desk at Bitvo?

Shane: Generally a crypto institutional desk is run similar to what you see in the traditional “old school” institutional desks. If I had to point to one major difference, it would be the way we deliver price discovery.

What I mean by that is, instead of having essentially one central marketplace or price, in crypto, price discovery is provided by a series of independent entities across the world.

Using an OTC (over the counter) type desk in crypto allows us to reach out to our multiple trusted counterparties to source, accumulate or distribute positions. It helps us provide informed price discovery for our clients. It’s a process. Generally, prices are similar across global markets, but when large orders are involved, a more sophisticated approach is required.

What are the key challenges you are trying to help institutional clients within this market?

Shane: As Pam said, the focus of an institutional desk is often to facilitate larger orders and provide guidance on how to do that, based on the client’s needs. So a key component is communication.

These clients may want to accumulate or distribute large orders which can involve slippage and significant price differentials. When you have big orders in a volatile asset, having access to a specialist to help you get it done can be an important advantage.

So we help by using our extensive relationships with trusted counterparties across the global market. This approach means we can effectively accumulate or distribute positions with the best overall price based on market conditions at the time. Sometimes that means breaking up an order into pieces. Other items that might mean spreading the order over the day or days. It all comes down to what the client needs.

When these crypto institutions, the miners and large traders and others contact you what do they expect from an institutional desk? Is it similar to a typical traditional financial institution?

Shane: The expectations are clear communication and trust. There needs to be an open dialogue so I can help the client execute whatever their strategy is.

For example, sometimes the trade is too big to execute easily based on market conditions. So, I may advise them that it’s probably better to spread the execution over say a couple of days. This allows us to ensure they get the best price across their entire order during our execution.

In another situation, the client might have an entry point or trading strategy that is based on a trigger. So the very best price may not be the first consideration in this case. Here I can help them achieve the desired position or outcome based on a clear execution strategy that we will implement for them.

So trust in an institutional setting means clear communication and open dialogue combined with market expertise and using regulatory standards.

So you use standard best practices for client execution?

Shane: Exactly. Although the industry isn’t currently regulated in many ways, we have built our business in anticipation that these regulatory practices will become the standard. And frankly, experienced institutional players expect this standard, especially the more traditional asset managers. It builds trust and credibility.

How have you incorporated regulation into your business?

Pam: We adhere to all AML, KYC, suspicious transaction reporting, as well as your typical trading execution standards and insider trading rules that a traditional financial institution would. All of that which is based on existing regulation for traditional financial asset trading platforms.

We’ve purposely used current regulation since day one as a part of our business. We believed from the beginning that regulation was inevitable, and we’re complying at the level we believe will be eventually be required. That level in our mind, at least at first, is the level of the existing financial institutions, bankers and traders. So essentially our mission is longevity. We are ensuring we’re around for the long haul by adopting these policies as a normal course of business well before they are required.

The crypto business obviously has entrepreneurs, but it also has financial professionals like yourselves. Is there an advantage to one kind of experience or the other?

Pam: It’s really a mix. There are people who have a similar background to mine or Shane’s – business school, then work in traditional finance before making the switch over to being crypto entrepreneurs. There are also serial entrepreneur types who have more of a background in crypto and technology than maybe anything else. Some have been at the crypto game for as long as it’s been around. Their expertise is often highly technical, not financial. But it’s these entrepreneurs that have brought this area to life.

The trend appears to be moving towards adding more traditional financial background types. I think that’s because, as the industry matures, there is a recognition that regulation is inevitable. It’s coming. So financial professionals provide expertise developed in regulated environments that will be useful as the industry matures and evolves.

Financial experience is now becoming recognized as a competitive advantage. If you are a large asset manager with billions in AUM, do you want to work with people who have no idea how your business works as a professional investor? Or would you rather work with people that understand not only the crypto space but your business because they came from it? So financial professionals with reputations and track records are increasingly seen as assets in crypto.

Now having said that, it’s the entrepreneurs in this space that bring youth and an open mindedness. They are nimble and open to changes and challenges. They can move fast. Entrepreneurs are often stifled in the traditional banking system. Banks are massive institutions with decades or centuries-old traditions. They have lots of bureaucracy making them slow-moving and strict, with layers of approvals to go through to get things done.

In an environment like crypto, talented entrepreneurs have room to spread their wings. The people with financial backgrounds help these entrepreneurs by guiding and shortening the learning curve in important areas like regulation and client interactions.

We’ve found this mix to be a tremendous asset at Bitvo.

How do you see the institutional part of the business developing, going forward?

Pam: We are anticipating two things driving adoption in the near term.

First, traditional asset managers will start to add some exposure. This will likely come in waves but, for now, there is a reluctance by this traditionally conservative risk-averse sector to be first. The first ones will test the water with very small allocations. As the comfort level in the space increases, so will the allocations, which will change the dynamics of liquidity and volatility.

Part of that comfort level will be provided by regulation. Too many of the firms that have failed so far, would not have met any minimum standard of current regulation. There are others that will struggle and disappear once standards are implemented. But the tradeoff is that, for wider adoption, these standards will need to be present, which is where financial experience starts to become an asset.

When you said that you built your business around the regulatory standard you expect to be implemented, what might that look like for crypto?

Pam: In terms of regulatory approaches, we have yet to see what the Americans will do. There are other jurisdictions, like Bermuda, that have recently implemented robust crypto compliance regimes designed specifically for crypto.

It will be interesting to see where Canada comes out on that. Regulators in Canada are actively working on a framework for crypto regulation. We aren’t clear on whether they will adopt existing securities legislation or customize new legislation similar to the Bermuda approach.

Our view is that due to crypto’s unique characteristics and international significance, it deserves a new approach more like that of Bermuda. One designed from the ground up. There are certain elements of crypto that are not well served by existing securities laws. Simply adopting existing securities laws will create a strong incentive for regulatory arbitrage. Regulatory arbitrage will not only take the transactions with it, but also the innovation, development and entrepreneurial talent of crypto as well. These setbacks won’t be easily overcome once set in motion.

We are looking to Canadian legislators and regulators to take a grassroots approach and develop a regime truly for crypto. We have plenty of entrepreneurs, financial expertise and innovative capacity to drive development of this space in this country. We believe that those places that take this grassroots approach will have a significant advantage in the space going forward. Canada can and should be one of them.

If people have any questions about trading with Bitvo, they can get in touch through the site?

Pam: Yes, our contact information is available at Bitvo.com

Pam, Shane, thank you for your insights today. Great to talk to you.

Pam: Thank you.
Shane: Thanks.

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Bitvo gives Canadians a secure, fast and easy way to buy, sell and trade bitcoin, ether, QCAD

and other cryptocurrencies on a secure state of the art cryptocurrency trading platform.