LSE breaks into cryptocurrency industry by selling trading tech
Hong Kong, 22 January 2019 - The London Stock Exchange is breaking into the cryptocurrency industry by agreeing to sell some of its trading technology to AAX, a Hong Kong-based digital asset exchange.
The deal will be the LSE’s first sale of its systems to a cryptocurrency exchange and comes as concerns about the safety of such platforms are hurting the sector.
Cryptocurrencies such as bitcoin and other digital assets have faced big hurdles in gaining acceptance by traditional investors, often because of regulatory concerns and questions of security surrounding the technology used in the industry.
While the underlying blockchain technology behind many digital assets is regarded as unhackable, cyber heists in recent years have targeted other weaknesses in the systems, resulting in hundreds of millions of dollars in losses.
The sheer scale of development and investment in the crypto industry has opened opportunities for traditional stock exchanges. Investment in crypto-related assets, including cash from venture capital, hit $24.4bn in 2018, more than doubling from $10.1bn the year before, according to Autonomous Research.
“If you look at the traditional market, there is a limited number of traditional exchanges,” said Lorne Chambers, global head of sales and marketing at LSEG Technology. “But there are a number of crypto exchanges springing up.”
Several other digital asset exchanges have bought technology from the traditional side of the market. For example, cryptocurrency exchange Gemini agreed to acquire market surveillance technology from Nasdaq last year.
The AAX exchange, which is backed by Hong Kong-based Atom Group, will buy the LSE’s Millennium Exchange matching system, which is already used to match trades on traditional stock exchanges in places such as Hong Kong and Singapore.
More than 1,000 cryptocurrency exchanges have popped up around the world during the past three years, with most designing their own systems.
“One of the things we see in crypto is a lot of people have built their own technology,” said Peter Lin, chief executive at Atom. “One of the things we need moving forward is to bring in more technology from regulated markets to make sure this is safer for investors.”
Cyber thieves made off with $530m from Japan’s Coincheck last year in what was the world’s largest cryptocurrency heist at the time. Other major recent exchange attacks include that on South Korea’s Youbit, which lost 17 per cent of its assets in 2017, and the $480m siege of Tokyo-based Mt Gox in 2014.
Some exchanges, such as AirSwap, have vowed to fix the problem with so-called “decentralised” exchanges that do not hold investors’ assets or play a centralised clearing function.
In other cases, blockchain companies are designing technology for traditional exchanges. Digital Asset, for example, is in the process of revamping the Australian Stock Exchange’s post-trading system.
“I think the trend is now a two-way street between crypto exchanges trying to leverage or purchase expertise from established exchanges in the non-crypto space, and established exchanges partnering with crypto expertise to leverage the underlying blockchain technology for the traditional securities space,” said Etelka Bogardi, a partner at Norton Rose Fulbright in Hong Kong.