Comparing institutional-grade crypto exchanges

Institutional-grade crypto exchanges

In this article, I will take a closer look at crypto exchanges catering to the needs of institutional investors, and will give an extensive overview of the defining features alongside risks and drawbacks of each one. I will cover GDAX, Gemini, GBX and Legolas Exchange. While GBX and Legolas Exchange are not yet live it is worth keeping an eye out for them due to their product vision and the potential.

Global Digital Asset Exchange (GDAX)

GDAX is a well-established cryptocurrency exchange launched in May 2016 by Coinbase Inc. and based in San Francisco. Currently, GDAX is one of the highest volume exchanges and operates in the US, Europe, UK, Canada, Australia and Singapore.

Key features

Well-established brand

Coinbase Inc. is one of the best established and most trusted brand in the crypto market. They currently store approximately $9 billion of crypto assets on behalf of Coinbase and GDAX customers and are the leading digital currency company.

Experienced team

They have approximately 200 employees working across three offices in New York, London, and San Francisco. With GDAX and Coinbase under their belt, it is safe to say that this is one of the most experienced teams when it comes to centralized crypto exchanges and crypto brokers.

Reinhard Zach

Institutional investor focus

GDAX offers accounts for institutional investors, which have higher withdrawal limits. They also offered margin trading for a short period of time, however, disabled it after a series of margin funding liquidations lead the Ethereum price to drop from over $350 to as low as 10 cents within a few seconds. So we might see margin trading making a come back on GDAX in the future.

Furthermore, GDAX recently announced a partnership with Trading Technologies (TT), a global leader of trading software. Beginning this March, TT customers will be able to use the TT platform to trade directly on GDAX. This means thousands of institutional investors will be able to trade via TT on GDAX, alongside nearly 45 other markets, including the CME Group which offers Bitcoin futures.

Fiat custody at banks

US dollar fiat funds you submit to GDAX are held in anonymous FDIC-insured banks located in the US, or in US treasuries. Euro and GBP fiat funds are also held in segregated, custodian bank accounts, but are not FDIC-insured. Nonetheless, even if Coinbase and GDAX were to fail as a business, the funds held in the custodian bank accounts could not be claimed by Coinbase, GDAX or its creditors, and would be returned to you.

0% fee on sell orders

GDAX charges users no fees on sell orders, no matter how large their trading volume is.

Buy order fee rebates

At GDAX, all users are eligible for fee rebates on their buys if their trading volume exceeds certain thresholds. While in general users pay 0.25 per cent fees, users that exceed one per cent of the monthly total exchange volume (~1,550 BTC as of February 2018) pay 0.24 per cent fees, users that exceed 2.5 per cent (~3,890 BTC as of February 2018) pay 0.22 per cent fees, and so on.

The user’s volume and fees are calculated on the basis of the preceding 30 days, and for each order book separately.

No wire transfer deposit limits

When using wire transfers, there are no limits on fiat deposits for both individual and institutional users.

Downsides

Centralized architecture security

Due to its centralized architecture, you need to deposit your tokens and coins to the exchange in order to trade with them. A single hack could mean a loss of all your tokens. As an added security measure, GDAX holds only two per cent of your tokens online, with 98 per cent offline in cold storage to minimize the risk of loss from hacking. GDAX is insured to the extent of being able to cover the two per cent of tokens in case of a security breach or hack, employee theft, or fraudulent transfer.

Nonetheless, experts recommend holding cryptocurrencies offline in your own hardware wallet and not on a centralized exchange.

ACH & SEPA deposit limits and duration

GDAX determines your ACH or SEPA deposit limit from your account age, buying history, and account verification for both individual and institutional accounts. Furthermore, those deposits take usually three to seven business days. However, there have been reports from users who waited for weeks for their funds to show up on their GDAX account, without getting a response from the GDAX support.

Coinbase recently announced a deal with Barclays, so this might be improved in the near future, at least for UK customers. Furthermore it was granted an e-money license by the U.K. regulator the Financial Conduct Authority (FCA), and adds support for the Faster Payments Scheme (FPS) soon.

Fiat withdrawal limits

GDAX severely limits the amount users can withdraw per day to $10,000 for individual accounts and $50,000 for institutional accounts. This applies to ACH, SEPA and wire transfers.

No independent security audits

GDAX does not conduct independent audits of their trading platform, which could lead to security issues.

Limited range of tokens/coins

Currently, GDAX offers only Bitcoin, Ethereum, Bitcoin Cash and Litecoin for trading. It is planning on adding more tokens and coins in the near future, though no exact dates or details are known at the time of writing this article.

 

Gemini Exchange

Gemini was the first licensed US crypto exchange for trading Bitcoin and Ethereum. It was launched in 2015 and is based in New York. Gemini is a fiduciary and subject to the capital reserve requirements, cybersecurity requirements, and banking compliance standards set forth by the NYSDFS and the New York Banking Law.

Key features

Experienced team

Gemini Exchange was founded by the Winklevoss Twins who are famous or infamous for their involvement with Facebook. They are rumored to own one per cent of all Bitcoin in circulation and have been active in the Bitcoin community since early 2013. Currently they are employing 55 people (as of February 2018).

Institutional investor focus

Gemini is currently one of the most trusted crypto exchanges by institutional investors. Gemini got endorsed by Ari Paul from the hedge fund BlockTower Capital, which deals in virtual currency and is used by CBOE Global Markets as the basis for the daily settlement of the bitcoin futures. Gemini offers dedicated accounts for institutional investors, with higher depositing limits and multisig wallets.

Fiat custody at FDIC-insured bank

All USD funds you submit to Gemini are held in an omnibus account at an anonymous FDIC-insured bank located in the US. Furthermore, the funds are segregated and legally distinct from Gemini, so even if Gemini went bankrupt your funds would still be refundable to you.

Daily auctions

Gemini conducts auctions on a daily basis for certain trading pairs. The aim is to focus market participants and economic information at a single moment in the day, resulting in a better price discovery and a higher liquidity. Auction participants that are looking to execute buy or sell orders for a large quantity can potentially receive a better price because the demand quantity is hidden. As an incentive, auction trades are eligible to lower fees.

Fee rebates

At Gemini all users are eligible for fee rebates on their buy and sell orders if their trading volume exceeds certain thresholds. Typically users pay on buy orders, sell orders and auctions 0.25 per cent fees. However, if your trading volume is greater or equal to 1,000 BTC your fees are reduced to 0.23 per cent on buy orders and 0.2 per cent on both sell orders and auctions. Should you reach a volume of 5,000 BTC buy order and auction fees drop to 0, while sell order fees get as low as 0.1 per cent. The user volume and fees are calculated on the basis of the preceding 30 days, and for each order book separately.

Instant bank transfer deposits

ACH deposits, so regular bank transactions, are made immediately available for trading and are typically fully settled in your account available for withdrawal within four to five business days.

No wire transfer limits

When doing wire transfers, there are no limits on FIAT deposits or withdrawals for both individual and institutional users.

Downsides

Centralized architecture security

Due to its centralized architecture, you need to deposit your Bitcoin and Ethereum to the exchange in order to trade with it. A single hack could mean a loss of all your tokens. As an added security measure, Gemini holds only a small amount of your tokens online, with the majority offline in cold storage to minimize the risk of loss from hacking. Nonetheless, experts recommend holding cryptocurrencies offline in your own hardware wallet and not on a centralized exchange. Unlike USD on your Gemini account, which is covered up to $250,000, tokens and coins lost through a hack are not protected or covered by the FDIC insurance.

No independent security audits

Gemini does not conduct independent audits of their trading platform, which could lead to security issues. Since they are subject to the NYDFS cybersecurity regulation, along with a couple of other regulations that entail expert audits, this problem might be negligible, even if the audits are not independent ones.

Only Bitcoin and Ethereum

Gemini only supports Bitcoin and Ethereum trading and has yet to mention any plans on adding more in the immediate feature.

Bank transfer only for US users

ACH deposits are only available to users from the US. Users located outside the US have to use expensive wire transfers. However, wire transfers typically come with high fees for both sending and receiving, and not all banks support them. So you might have to use a wire transfer service like Western Union or MoneyGram.

ACH deposit and withdrawal limits

ACH transfers deposits are severely limited. Individual users can deposit $500 and institutional investors $10,000 per day. Withdrawals are limited for both individual and institutional investors to $100,000 per day.

Limited global availability

Gemini Exchange is excluding big shares of the crypto market, by not accepting users of the European Union, Japan, Australia, Russia and China amongst others. Currently, they only support 46 US states, Puerto Rico, Canada, Hong Kong, Singapore, South Korea and the United Kingdom. However, Gemini accepts institutional clients outside of their area of operation on a case-by-case basis.

 

Gibraltar Blockchain Exchange (GBX)

GBX is a subsidiary of GSX, which operates the Gibraltar Stock Exchange, and aims to become a token exchange complying/compliant with the needs of institutional investors. Furthermore, it is also aiming to become a platform to host ICOs. During its ICO, it collected about 35,000 ETH in total between December and February 2018. GBX is said to launch in the first half of 2018 and is located, as the name implies, in Gibraltar

Key features

Institutional investor focus

GSX brings a lot of experience in the traditional financial sector along with a good reputation to the table. This makes it a trusted party in the crypto world for institutional investors. AML/KYC checks are required for all traders, and additionally, it offers multisig wallets.

ICO hosting platform

In addition to a traditional centralized crypto exchange, GBX wants to become a trusted platform for hosting quality ICOs by only approving applicants that adhere to certain standards, such as having a white paper and terms of sale in place. Tokens that were issued through GBX will be also tradeable on GBX.

Experienced team

Nick Cowan (CEO) is also the managing director of GSX for almost 6 years and has 35 years of experience in the traditional fintech sector as trader and manager under his belt.

Samuel Reid (Chief blockchain engineer) is the co-founder and CEO of Geometric Energy Corporation, a researcher for IOTA, and a mathematician with more than 10 published papers and a portfolio of classified work.

GBX Alliance

The GBX Alliance will be established to support the development of the digital economy in Gibraltar. It already established the GBX Blockchain Innovation Centre during September 2017 with the aim of supporting blockchain businesses in Gibraltar.

GBXs Rock Token

GBX issued its own token, the Rock Token (RKT), with its ICO. This token can be used to pay for various fees, such as trading fees, token listing fees and sponsor fees. Users with a larger RKT holding amount than 1,000$ will have early access to ICOs hosted on GBX.

User segmentation

Token buyers will be segmented into various categories, based on jurisdiction, professional or individual, and token buying experience, which token issuers can then use to target buyer segments according to their various legal/jurisdictional needs. Not all digital assets will be available to all users.

Security tokens via partner platform

Security tokens are backed by a real-world value like Tether is backed by the dollar or Venezuela’s Petro Coin is backed by oil. The SEC has its flexible test to determine when something qualifies as a security called the Howey Test. Since security tokens are heavily regulated, unlike utility tokens, GSX wants to launch its own platform later in 2018 called GSX Tokenised Securities Exchange which specializes in the security token. GBX itself will not list security tokens perse, however, they want to work closely with the GSX Tokenised Securities Exchange.

Downsides

Centralized architecture security

Due to its centralized architecture, you need to deposit your tokens and coins to the exchange in order to trade with them. A single hack could mean a loss of all your tokens. As an added security measure, GBX holds only a small percentage of your tokens online, with the majority offline in cold storage to minimize the risk of loss from hacking. Nonetheless, experts recommend holding cryptocurrencies offline in your own hardware wallet and not on a centralized exchange.

No independent security audits

GBX does not conduct independent audits of their trading platform, which could lead to security issues. It could also lead to GBX being perceived as non-transparent, leading to allegations of price manipulation or front-running.

Limited global availability

GBX excludes some of the biggest crypto markets worldwide, such as USA, South Korea and Japan.

Full list of excluded countries: People’s Republic of China or an entity formed under the laws of the People’s Republic of China, United States of America, Japan, South Korea, Afghanistan, Bosnia and Herzegovina, Central African Republic, Cuba, Democratic Republic of the Congo, Democratic People’s Republic of Korea, Eritrea, Ethiopia, Guinea-Bissau, Iran, Iraq, Libya, Lebanon, Somalia, South Sudan, Sudan, Syria, Uganda, Vanuatu, Yemen.

Only 35.4% of RKT issued

GBX sold only 35.4 per cent of the entire RKT supply during their ICO. This means a huge portion of almost 65 per cent of the total supply stayed with the GBX team, which could significantly weaken the value of their token in the eyes of investors.

Misleading marketing

GBX claims that there is no rule in the crypto space, which is obviously not the case when you know how the SEC operates in the US. Furthermore, it pretends to be regulated in the sense of traditional finance standards, when in fact all it does is comply with the distributed ledger regulations (DLT), which are pretty standard and mandatory in Gibraltar.

 

Legolas Exchange

Legolas Exchange aims to become a transparent and high liquidity crypto exchange with a big focus on security and scalability. During its ICO, it collected about 3,640 BTC in total between November 2017 and February 2018. The exchange will go live in Q3 2018 and it is based in France and the USA.

Key features

Scalability and high availability

Legolas Exchange incorporates features of both centralized and decentralized systems. It is facilitating a semi-decentralized order matching protocol where incoming orders and transactions are encrypted, timestamped and stored in a blockchain, while the order matching is made off-chain. Centralization of order pooling and order matching leads to efficiency and scalability, bypassing current blockchain limitations. With this approach, Legolas solves the scalability issues every big centralized exchange regularly suffers from, which in most cases barely reaches a 97 per cent availability (~ 11 days downtime per year) and often times even closes registrations of new users for weeks or months.

Decentralized cold storage

Ledger hardware wallets are incorporated in a decentralized manner into the Legolas ecosystem, as cold storage is the most secure way to protect crypto assets from hacking attacks. Legolas’ clients never have to give their assets out of their own hand to trade, and are always in possession of the private key to their tokens.

Institutional investor focus

Legolas Exchange partnered with experienced brokers such as the Makor Group that leverage its relationships with tier one banks to provide a custodian solution for institutional investors who want to trade cryptocurrencies. This means Legolas Exchange will have multisig wallets and verified trade counterparts through complete AML/KYC checks amongst other features required by institutional investors.

Fiat custody by tier one banks

Legolas users fiat money will be custodied by tier one banks, which is not the case with current crypto exchanges. Tier one banks refer to banks which are global leaders in most product categories such as J.P. Morgan, Citigroup, Bank of America, Goldman Sachs and Morgan Stanley (as of Sept. 2017). This means Legolas is not holding any fiat money deposits but is using trusted and well-established partners, which adds another layer of security, and even if Legolas failed your money would still be on your own bank account.

Large and fast fiat transactions

By handing the fiat custody to established banks, Legolas Exchanges’ clients are able to withdraw and deposit fiat currencies in very large quantities in less than a day. This removes a major bottleneck for large investors and traders who are looking to move millions of dollars in a short period of time.

Verifiably price manipulation-free

All exchange operations are traceable in a public blockchain. This means everything is transparent and hence demonstrably representing the actual market. With this, Legolas Exchange is able to prove that no front-running and market manipulations take place, which many centralized crypto exchanges are frequently accused of.

Profit sharing

Legolas Exchange has its own token called LGO. This token is used to pay for trading fees, but moreover, it is used to share the exchange profits. Legolas burns 25 per cent of the LGO tokens they collect through fees on a daily basis. This constantly reduces the supply and subsequently increases the price per token, which means holders of the token are directly profiting off the exchanges’ trading volume.

Liquidity provider rewards

Since Legolas Exchange aims to be able to handle Institutional Investors and as a consequence a very large trading volume, they offer rewards to liquidity providers to attract the necessary market makers. Twenty-five per cent of the fees collected by the exchange go back proportionally to liquidity providers.

Token listing democracy

Legolas Exchanges LGO tokens enable holders to nominate and vote for altcoins that should be added to the exchange. The amount of your LGO token holdings defines the weight of your vote, however, the vote itself is free. So unlike most other crypto exchanges, that charge projects between $100,000-$400,000 to get listed, Legolas lets the community decide which tokens will be tradeable.

Automated jurisdiction-specific reports

Legolas Exchange offers client-specific automated detailed reports tailored to each jurisdiction. Clients can download a comprehensive report of their trading activity, their holdings and their profits and losses. This way clients can comply very easily with their own jurisdiction and determine taxes that need to be transferred.

Independent security audits

Hacken partnered with Legolas Exchange and is providing them with code audits and CS services including a bug bounty to ensure their systems are secure and compliant with cybersecurity standards and regulations.

Experienced team

Ouziel Slama (CTO) was the former lead developer at Counterparty, one of the first decentralized Bitcoin exchanges. He and his team of developers have extensive technical experience in blockchain development.

Frederic Montagnon (CEO) has been an entrepreneur for more than 20 years and created multiple startups more than $400 million in value. He has been in the crypto space since 2011.

Downsides

Hardware wallet required

It is not possible to use Legolas Exchange without owning a Ledger hardware wallet due to its hybrid architecture. This could deter smaller traders that are less concerned with the security of their funds.

Token listing limitation

Legolas Exchange can not list tokens and coins not supported by Ledger Hardware Wallets. Ledger supports new tokens on a constant basis and supports most large market cap projects. However, this means Legolas Exchange is somewhat dependent on Ledger and their progress before they can list any new token.

Trade latency

The semi-decentralized architecture comes at the cost of a small delay until an order is finalized, as the blockchain requires a very short delay for validating blocks of randomly ordered transactions. However, Legolas Exchange still manages to be faster than any classical decentralized exchanges due to its hybrid architecture. They also plan on integrating the Lightning Network as soon as it becomes feasible.

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