A blockchain startup now enables custodians to bypass clearinghouses and settle trades directly

Fibo Quantum

Quick Take

  • OTCXN, a blockchain infrastructure startup, is testing a new technology that allows custodians to settle trades directly on their clients’ behalf
  • The company tokenizes escorted assets at different custodians so that they can be easily traded and settled on OTCXN’s platform, making large trades between institutions more efficient 

Settling large trades between two different custodians can be a headache, and a blockchain infrastructure startup wants to streamline the process by tokenizing assets under custody on its blockchain. 

San Francisco-based OTCXN is testing a new service that will power cross-custodian settlements, allowing institutional traders to hold assets at their counterparties’ custodians even when they do not have accounts there. This means custodians can settle a trade on their clients’ behalf directly, without traders having to redeem assets from their own custodians first and then depositing them at their counterparties’ custodians. 

Partnering with custody firms like Kingdom Trust and Prime Trust, OTCXN aims to establish a network of custodians whose stored assets can be tokenized on OTCXN’s custodial blockchain ledgers. These tokens, representing the actual assets under custody, are then traded and settled on OTCXN’s platform, accelerating the entire settlement process. 

“Our model can support cross-custodian settlement because we have a custodial blockchain ledger,” said OTCXN CEO Rosario Ingargiola. “We are able to facilitate transactions custodian to custodian where essentially tokens are re-allocated on the respective custodian ledger.” 

According to OTCXN COO John Morris, existing cryptocurrency custodians, including OTCXN’s rival BitGo, are too isolated, since they generally only allow internal settlements between existing accounts on their platforms. Settling trades with external custodians still requires clearing houses as with traditional financial markets. The ability for custodians to settle trades directly with each other, however, may accentuate their role in cryptocurrency trading and add liquidity to the market. 

“In the traditional market, a custodian is the supporting actor of the whole trading settlement process, and there are other actors that are doing more of a role like a clearinghouse. Within our system, those clearing houses are replaced by blockchain, and custodian becomes the center of the universe,” said Morris. 

Utilizing blockchain or decentralized ledger technology to simplify the settlement and clearing process in trading has long been considered one of the most promising use cases of this new technology. With several large banks including European Central Bank and Bank of America showing interest. However, a recent Bloomberg report points out that a blockchain-based security settlement system may end up being more costly and less speedy. 

Meanwhile, OTCXN is looking to expand its custodial network by offering its services for free and also sharing the trading revenue with participants.