Digital Asset Trading Tailored to the Needs of Financial Institutions
Recording and transcript from live event on Tue, 6th of February 2024 at 14.00 CET | 08.00 ET | 21.00 SGT. We hosted David Riegelnig, Founder and CEO of recently launched institutional trading platform Rulematch.
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After an extensive career in traditional finance at Credit Suisse, David served as a member of the Executive Board at Bitcoin Suisse, Europe’s oldest and largest crypto broker. Prior to founding Rulematch, David has previously founded an algorithmic trading company and has served as president of the OpenVASP Association.
Seamus has extensive domain expertise in investment banking, wealth management, commodities and crypto markets that spans market structure, regulations and technology. He spent 20 years building and managing trading operations across all the global financial centres with JP Morgan, Deutsche Bank, Barclays and Bank of America Merrill Lynch.
*Disclaimer: The accuracy of this transcript is not guaranteed. This is not investment advice, and any opinions expressed here are the sole opinions of the individuals, not of the institutions they represent.
[00:00:11] Seamus: Welcome to the 44th episode of Metaco Talks. Today we’re joined by David Riegelnig, founder and CEO of Rulematch, an interbank trading and settlement venue for digital assets and cryptocurrencies. David has had an extensive career in traditional finance with over 15 years at Credit Suisse. David went on to found an algorithmic trading company and has been active professionally in the crypto and digital asset space since 2018 as a member of the executive board at Bitcoin Suisse, Europe’s oldest and largest crypto broker, and as President of the OpenVASP Association.
David, great to have you at Metaco Talks. Welcome.
[00:00:47] David: Thank you, Seamus. It’s great to be with you here today.
[00:00:49] Seamus: Congratulations on the launch of Rulematch. I definitely want get into the details on that. Before we do that though, I do want to start with the journey from TradFi into digital assets. It is always interesting. Would love to get your background a little bit of the journey before you founded Rulematch.
[00:01:08] David: I would jump right in. You said it right; quite the traditional background and career in the variety of risk control and governance functions in banking, also having seen different divisions, private banking, investment banking, and so forth. Always had a big heart for trading and technology around. I think it was quite natural to eventually, and also detect the whole crypto space. I think that’s probably here in that context relevant.
It’s always a funny story around 2012 when I discovered Bitcoin and got right into it and thought, that’s nothing new. What do these kids want to tell me? I think it was a year later, only 2013, it was through Ethereum when I learned that somehow in combination with the whole programmable money thing. I understood the idea of decentralized consensus and I got hooked since then, in the beginning as a hobby in spare time then later on, as you said, as part of my career.
[00:02:19] Seamus: It’s a familiar journey. I could tell a similar story. What is Rulematch and what problem are you trying to solve? What was your conviction about starting this company?
[00:02:30] David: It was the whole founder team of all four of us having pretty much the same journey as I just explained before, coming all from banking and trading and a Trade-Fi background. Then once in a while, I got into crypto.
The team met as part of the executive management of Bitcoin Swiss. When you come from that traditional background, you have all the understanding, so to speak, in all flavours about regulation and about why these controls exist and why the value chain is as it is when it comes to trading and clearing and settlement and the likes, and many other topics such as capital requirements and AML and sanctions and all those topics. Then no doubt that you have a bit of a special perspective when you look at crypto. At the same time seeing that a very big disruption is coming. That was clear from day one.
I think when we started out the Rulematch, it was very clear that we want to build a trading venue which is here for regulated professionals or regulated institutions.
Maybe also let me share here another experience we had. You said we were at Bitcoin Swiss, which is one of the pioneers. That was a time particularly in Switzerland, very early, already in 2017-18 as part of the first wave, when more and more banks became interested in offering cryptocurrencies for their clients, because simply the wealth management clients were demanding. I want to have maybe 1-2% of my portfolio in Bitcoin.
They stopped by and there was almost no bank. Even from the States and everywhere, they came to the Crypto Valley. Many of them visited Bitcoin. Back then even the later ICC chair was once with us, funny story. They wanted to learn. Some of them started out asking, on an RFQ basis, white label services, could we get into it? We quickly saw and learned that it’s not a lack of willingness to go into crypto for these banks, but it’s quite hard to include these types of services into the offering.
Certainly, one key driver has been just to make sure that Rulematch can offer a venue, I don’t want to say exchange deliberately, the trading venue, which is ideal for regulated institutions. As you know, there’s a number of things behind that. For example, never being a counterparty, as ourselves. We operate as a market operator, so we are never ever counterparty. Because let’s be honest, these so called crypto exchanges, they’re well known names, they’re effectively a broker. You buy and sell from them in the end. They might have an order book on the UI, but these are not exchanges. I think that’s one element: the lack of functional differentiation, segregation of duty.
Also the certain lack of adherence when it comes to AML. We also quickly in the end understood that there is a real need for institutions to trade among themselves.
I think probably the final topic, which is really critical and a key USP in what we are doing is the lack of post trade settlement in crypto space nowadays. Because it has grown up from the retail space, everything was prefinanced, and that really is inefficient. We might talk about that maybe also later on, but I think you can go with this. I think the element of that you would trade now and settle a bit later is still very efficient. You can’t do this with retail clients. But that’s a key topic that in our case, since we only admit banks and securities firms, we can also enable a proper post trade settlement, which is very efficient.
[00:06:27] Seamus: It sounds like you’re saying Rules is very much the appropriate name, bringing some maturity and rules to the crypto market.
Is this still an existing problem, even in 2023, the market lacks those appropriate frameworks?
[00:06:43] David: Completely. Starting with as I said before, the so called crypto exchanges, typically having all functions under one roof. This was a very heavy fraud case. I don’t want to put all of those in this camp, but still in mature markets, you have your trading, your clearing, your settlement, your custody, your staking, your leverage, everything under one roof.
That would never fly if these tokens are securities. Typically, certainly not in a place such as Switzerland, for example, but very similarly in most parts of the world. I think we have still this anatomy that the market is dominated by these very early retail focused brokers that call themselves crypto exchanges. This is one of the key barriers for institutions. If you want to enter the market with serious business, you do care about counterparty risk. Let’s be clear, also these so called exchanges, their matching algorithms, their market surveillance has rarely been ever been audited and fully tested. There’s quite level of trust required.
Last but not least, thinking about the post trading phase, the prevalent model of pre financing is not attractive for institutions at all.
[00:08:16] Seamus: You’ve mentioned a couple of interesting things there. Trust is clearly an issue with centralized exchanges. The ethos of crypto is always atomic settlement, no counterparty risk, peer to peer. How specifically have you addressed those different trust mechanisms, controls in crypto trade?
[00:08:30] David: This is an interesting topic. All the possibilities that decentralized mechanisms such as decentralized exchanges can offer, no doubt that there will be a continuous increase in relevancy. At the same time, we believe for a very long time in a coexistence of centralized and decentralized models. But as soon as you are an intermediary, which comes with centralized models, there is regulation, I think for a good reason, because it really protects participants and investors down the road.
In our case, and to your question as with respect to controls, I think it’s really very important to start with the principle of, do we have a business model where you are never a counterparty? In our case, we are an only a market operator. Our participants, which are banks and securities firms, trade among themselves. It’s never Rulematch in the middle. That’s very important. Even though we facilitate not only trading, but also clearing and settlement in the sense of delivering payment, we make very clear as part of the contractual framework of the fiduciary setups how the assets are maintained and so forth. It’s never on our balance sheet at all. I think that’s the starting point, a key control against the counterparty risk that Rulematch might be for these participants.
The next thing, and this is also a very important topic, is the non discretionary nature of what we do. I think it goes beyond just counterparty risk. In our case, we are strictly rule book bound to the point of rules, which means that exactly the same principles apply to all participants. That’s also something which is not a given typical in the crypto space. This starts even with topics such as fees; there’s not a side deal here or something like that, even prices being in the rule book. But even more relevant when it comes to crucial topics, such as counterparty or participant default, buying processes and so forth. How does this work? Equal rights, equal treatment with respect to the low latency field, to make sure every counterparty and participant is treated the same, and that we as Rulematch would never interfere in the market, not as a market maker or whatever, in any form.
That is that the rigor, or the lack of thereof in the market in general, which I think is still 95% of all trading when it’s out there is not fulfilled in crypto space.
[00:11:04] Seamus: Clearly that’s a bottleneck for most, and why the OTC market is still the first choice, because they’re not too sure how to interact or what they’re interacting with an exchange.
Given you’re serving banks and you mentioned the HFT space, how are you addressing the issue of counterparty risk for them? The fairness level, the level of playing field is clear, but how about the margin process?
[00:11:26] David: As I said before, we are never a counterparty, all funds are in a fiduciary set up. It’s maybe important to mention here on the fiat side we work with, let’s say on the Continental Bank case, with banks. You open up a dedicated sub account for each of these participants with the bank, and on the crypto side we use the Metaco system for segregated wallets for each account, which is a key topic here as well.
There the certainty of the Swiss legislation, which is also codified, it’s the law that whenever you store crypto in segregated wallets they are off balance sheet. They are protected from bankruptcy, which is absolutely critical. They belong to the customers, to the participants.
To start there, when you say about you have to make sure that there is equal treatment and controls, with respect to the whole topic of the trading side, we do use the NASDAQ matching engine, which for us was also very important to go also there, not only for cost, but also for trading, for a best of approach. We are quite proud and happy that we are very able to win NASDAQ our provider. We do want the matching engine there. I think also it gives participants really the certainty of how the whole matching algorithm works. How all the trade orders work, how all conditions work; there is an opening auction and end of day auction so to speak, despite the fact we have a 24/7 trading.
You have all these really proven processes, these proven systems, with respect to fairness of the matching process.
We have a classic central limit order book with a price time priority. Nothing fancy there. But again, it really stands. It uses tools that would send a test of time. This is another very important factor with our participants. I would like to add with respect to the HFT participants that you were mentioning, what is also very important is that Rulematch despite the fact we’re only admitting banks and securities firms as start participants, we are here for their clients. Rulematch, we have made clear right from day one that we have built the platform to facilitate sponsored access and direct market access model so that banks can, particularly for institutional hedge funds and others, trading firms, to allow them to use the platform in a sponsored fashion.
This comes with a whole set of additional controls, such as individual risk limits for each of their clients, to make this work.
[00:14:30] Seamus: It sounds like a new paradigm that you’re bringing to the space.
You mentioned earlier about a rule book. What is the implication of having the rule book? You see real books in the traditional exchange space, has that been something that’s been common in the digital asset space?
[00:14:49] David: I think that there are only maybe a handful of others in the spot market. We talk here CryptoSpot, not the CME, which is a very established one. But I think on the CryptoSpot, there are maybe just two, three other competitors out there, which do the same.
These are also new. For sure these are probably the venues 2.0. We believe there will be this massive disruption; it is now on the way, from this probably very retail oriented one-stop-shops in the beginning towards this more differentiated landscape.
But I think the implications of being rule book bound, first and foremost it is a commitment and a promise to your participants that they know exactly for each and every situation how we are going to treat you in trading, during clearing and during settlement, and even more important towards post trade, I would say. It gives them possibilities to call on you or to check whether you have fulfilled what you have promised them. It gives a high certainty. In the end it is a testament to the nondiscretionary characteristics and equal treatment. I think as long as it’s not really promised and written down and agreed what exactly the rules are of behaviour in all situations, you never know exactly until it happens. That is the implication.
Yes, it is a hassle being rule book bound. All those who have done it before know exactly that it is massive work, because you cannot just quickly do something then all of a sudden in some freeform way you have laid out exactly what the procedures are. You also promise to your participants, that they would learn it once if you would change those procedures and the like. In the end, that’s about certainty, that’s about risk mitigation.
[00:16:56] Seamus: Clearly there’s a theme Here of transparency and fairness, which is dominating across what you’re saying.
You mentioned as well you’ve got a very keen focus on the ultra low latency. That seems to be something differentiated in this market. How does latency impact which markets and jurisdictions take centerstage?
[00:17:16] David: Latency is always important, isn’t it? There is no market where latency does not play an important role.
The crypto market specifically is very slow. It is completely dominated by retail players in the past. Given also the jurisdictional challenges and the regulatory challenges, we do know that some of these even well known so called exchanges operate in fraud places or even in unknown places. It typically boils down to certain places where AWS runs its large data centres, where they are.
In essence, in such an environment yes, latency seems to be not such a big issue. But at the same time, this offers, as you can imagine, tremendous opportunities for those who are willing to do arbitrage. This is already a big reality. But we are still in a point, it’s still early in the game. Still prices are made on a global level. I imagine that would never fly right in many other material markets where typically it makes a key difference on which continent, you have your matching done.
As of right now in crypto typically you still have markets being made. Across the globe, there are 100, 200 milliseconds of travel packaged time from a network point of view. Latency is still the norm. There is no doubt that this offers a fantastic opportunity.
In our case, yes, offering a venue for ultra latency, which is a robust venue, at the same time compared with this regulatory first approach, was always one of the key pillars strategically. Together with a sec solution, we have execution times down to 30 microseconds, which is very fast, which is somewhat close to where also traditional markets are, stock exchanges and the likes. This is a sea level change compared to existing crypto markets.
I think in our case, it is also relevant, not only for those who want to run these high frequency strategies, but it is foremost – we know how markets work – it is foremost important to also attract market makers and arbitrageurs, which provides the liquidity you need. We have designated market makers, which have a clear obligation. We work with flow traders and Bankauscheich in this case for the moment, more to come. But those are the two first designated ones. They can offer enormously competitive prices on our venue, not last because they have the ability to harness the speed of our platform.
This helps all participants to find fantastic spreads. That we had recently Ethereum coded to down to 1 cent spread, which is enormous.
[00:20:16] Seamus: Given this offering, are you able to now offer Rulematch in all jurisdictions? How is that?
[00:20:26] David: We can admit banks and securities firms from countries that are post member of the OECD and the FATF. By doing so, we have a level playing field. This would mean most countries out of the European Union, UK, Switzerland, Liechtenstein as an exception and Singapore. We do not onboard for the moment clients from the US, I would say unfortunately, but I think that is prudent. By doing so, we make sure that when it comes to AML rules, payments, sanctions, that we adhere to all of them across the globe.
That we do not accept members for example in the US, I think that ensures that the participants on our venue also feel comfortable trading with each other. That’s very crucial because in the end you face them. You do not face Rulematch, you face your participants.
[00:21:32] Seamus: You mentioned you’ve got a central limit rule book, you have a club and you’ve got segregated client accounts, and you’ve got low latency algorithmic trading. Clearly the assets aren’t moving with every transaction. How does this all work?
[00:21:48] David: The whole topic of post trade settlement is about netting, absolutely. If you trade heavily and regularly, we would typically find that conservatively you may have to settle maybe 20% if you would have to move it all the time, even more in certain cases.
This is the efficiency. That’s also an interesting challenge which is sometimes overlooked. With new technology sometimes people go overboard. Okay, blockchain, we can now do it; atomic settlement, let’s do it right away. But not all that is technically possible. There is a reason why markets work as they are. You could have done atomic settlements even before, not with the blockchain but you could have used databases for that. But there is a reason why you typically net out and then you settle, as we do. We have a key plus one settlement cycle, which allows you on a very efficient basis to deliver in your either fiat or token lag the next day.
Yes, this provides tremendous savings from a capital point of view. When you think of capital requirements, particularly for banks and securities firms, even more down the road, when you think of also regulation in the pipeline when it comes to crypto assets, which are quite punitively charged with respect to capital requirements, you have to be very careful there.
In this respect, we do believe that for quite a while, the idea of netting out and settle later is the way to go. Decentralized models and atomic swap models, maybe for certain niches and the likes, it’s fantastic, they will grow, there is a coexistence. But the bulk of trading will remain in a more efficient way. It’s a trade-off, in the sense of you’re going fully decentralized, fully smart contract based, but maybe less efficient, sorry to say. Or relying on intermediaries, doing netting, having custodians and so forth; there is an element of trust in it. But even more relevant, there is a quite a level of regulation. Regulation in combination with the trust element is efficient. It’s like I’m saying to people, it would be great if I would grow my food completely. I would exactly know what I eat all the time, but I want to do something else. I need to have trust for the rules and the regulation out there that I can trust.
In the same sense, it’s a bit of a silly debate that we need intermediaries, and therefore we need regulation rules, because you want to harness that efficiency. That has not changed with blockchain, and I think it would be very naive to believe that this type of atomic swaps would overnight become the norm. It will not for many, many years.
[00:24:49] Seamus: Yeah, I think we’re very much of the same view that trusted intermediaries are here for a while, and they do serve that efficiency. There’s a value proposition in terms of efficiency and regulation and scalability in many ways.
This notion of netting I think is pretty interesting. One of the things we’re always very keen on is networking on sub custodians because we view the value proposition that the assets eventually will not really move that dramatically. It’s almost a book entry movement or a netting movement between custodians. How do you see that evolving with liquidity?
[00:25:21] David: Absolutely. We see even a bigger potential, to be very honest. As of right now we are already happy as part of Rulematch, together with solutions Metaco that helps to facilitate the BBP, that we can guaranteed the participants deliver versus payment as part of that those segregated wallets, avoiding many of those transactions by doing this post trade settlement as part of it.
But yes, how fantastic would it be if you could harness it between different custodial solutions? I’m aware that there are some ideas around to make this happen. I do think this will be of key importance. We from our side would certainly embrace that development. I think we might also maybe even play a role in it, potentially helping. But I think there will be many solutions, probably competing solutions out there. But absolutely we believe the custodial solutions and systems have a great opportunity potentially of facilitating these type of cross custodian netting.
It’s also interesting. When you look at established, markets mature markets where you have a CCP and you have clearing house and the likes, that’s very heavily established. To some extent, it’s a bit monopolistic. You have typically one per continent almost, I’m exaggerating, but it’s a very small club. It’s highly efficient that they do a fantastic job. They are really the epitome of modern markets. But at the same time, it’s also not that bit of a challenge. I do believe that the tokenized value chain to some extent will also challenge these existing players, particularly if new challenges really are regulatory first and play by the same rules.
But maybe also explore different ways. Think of it. In our case, where we sit in the middle of an OTC or a CCP, which steps into both sides, we are somewhat in the middle, working with very clear incentives, with clear margins between participants, nevertheless facilitating multilateral netting. It’s highly efficient.
There’s a bit of a tail risk you have to live with. In our case, potentially you would have to fall back on bilateral if the clearing margin would not be enough, 99.9% in our case. But still, these are interesting in the middle propositions. I believe this might also be some positive healthy competition for the post trading space.
I do believe that custody systems will play an important role in facilitating these types of new routes.
[00:28:09] Seamus: I 100% agree. You mentioned earlier as well that you’re still leveraging the traditional fiat rails of a bank partner. How do you expect that will evolve with stable coins? We have a number of whether it’s Tether or USDC, there’s a lot of talk about bank issued coins or CBDC. What’s your view of how that’ll evolve and be part of your landscape?
[00:28:34] David: That’s such a vibrant and tremendous important segment, with so many facets.
To start with the current Fiat routes that we are using, in our case we use very much traditional routes because we do have for the moment trading pairs, which are listed against the US dollar. The traditional dollar rails are very important, and we are very happy that we have found a very strong bank and that supports that. We don’t see this go away so quickly at all. There’s also no reason. Why should we? To be very honest, an interesting side topic, I’m not sure whether we have time, but particularly in the United States there’s sometimes a narrative of de dollarization going on. I would say that’s probably a bit more of an industry narrative, sometimes from the crypto side to scare regulators. I don’t see this de dollarization happening.
Let me say here, we are Rulematch, a venue in Switzerland, middle of Europe, what do we do? We of course vote against the dollar, because that’s where liquidity is, as with most commodities. We are proud to do do, and we also do to take the corresponding responsibilities for all that comes with it for the regulatory point to very serious. I would say that’s a bit of a contrasting point, what you sometimes hear. But nevertheless, Fiat is here to stay. Particularly on the institutional side, very important, I think we will be here for years. We do not see a quick go away from Fiat. Why should we? Again, this brings us back to the real world and to regulation and to efficiency.
At the same time, stable coins provide tremendous potential. From our point of view, we would mostly bet on bank issued stable coins, such as those that we have seen for example in United States, say the pilots that J.P. Morgan is doing, or in Europe Societe Generale with Forge. We have seen in Switzerland some ideas, white papers from several banks. Or recently in Europe, another project where also our market maker float trader is involved for a Euro stable coin.
We do believe bank issued stable coins might be very attractive within the existing rules, within the existing regulation. Also, when you talk about AML, travel rule, proper conduct, within those rails. But leverage the tokenization, leverage blockchain, but not throwing it overboard, still maintaining good old payment principles and regulation, is the way to go.
This will allow us, Rulematch specifically, to have a quicker settlement cycle. I’ll give you an example. For the moment we have a 24/7 trading. As I said, T+1, the following day. But still cut off times, when it comes to international payments still is an issue. For example, on the weekends we do not settle. We have a long settlement cycle only on Monday. If you would have those stable coins, we could start doing this daily. It will be excellent.
This will be an interesting segment for us. We believe it’s maybe more the bank issued stable coins than the CBCs, to be honest that we would bet on. I think that might be the key theme for the next few years.
[00:32:07] Seamus: Again, it’s a regulated. Transparency to those coins probably opens up a new FX trading business for you as well, bigger picture.
[00:32:23] David: Absolutely. For sure.
[00:32:26] Seamus: We’re running up on time, unfortunately. But looking forward, thematically given the background TradFi, we see a lot of the TradFi names be that Larry Fink or others, evangelizing about tokenization. Would love to get your views on that. Does that fit in your roadmap for Rulematch as well?
[00:32:48] David: Absolutely. There’s also a multifaceted topic. First and foremost, sometimes this is black-or-white view, that blockchain is good and crypto not. We don’t share this.
We do believe that crypto as a class is here to stay, no doubt. At the same time, yes, let’s be honest, the real disruption will come with tokenization, no doubt. Financial instruments and forth, they will be tokenized. It takes time, but they will. I think what we are now building now, like Metaco, like us, like other players in the market, we are effectively building the rails for tokenization to come.
Yeah, it will take time. Everything else is naïve. If you want to replace some existing technology with new, you really need to show that you make something better, cheaper, quicker, and so forth. It certainly needs to play in the same rules. That’s important, regulation, that you do not compare apples with oranges here, but you need to make something better. This takes time.
In our view tokenization will be massive. We do believe that those banks and securities firms that trade and are engaged in crypto right now, most likely are those who will be the first to also be active in token security. I don’t talk about pilots; I talk about real world offerings. I think participants that we know, they of course talk about it, they have ideas about tokenization.
For Rulematch, as you can imagine, there is a perspective when we talk about non discretionary, when you think about all these principles, all these systems we use, all the effort. You can expect we don’t do it only for crypto, but it’s not about the time to talk about that. As of right now, we focus now on that phase, but certainly we will be prepared.
[00:34:50] Seamus: David, I think you reflect many things we’ve often said at Metaco. We always say, come for the crypto and stay for the tokenization. Effectively, if you build for crypto, tokenization is a free option. Everyone likes free options. We already talked about the tokenization of FX. We see stable coins is a great example that tokenization is happening and is starting to happen at scale. It’s coming, and it’s great to see firms like yourself building for that future.
Listen, it’s been great to have you here, David, really appreciate you taking the time. It’s been a fantastic experience. I’m sure the listeners really appreciate the insights. We’re rooting for Rulematch and its success in the years going forward. We love having partners like yourself.
[00:35:36] David: Thank you, Seamus. It was great.
[00:35:39] Seamus: Everybody, thank you for joining today, thanks for tuning in. Don’t forget to check out the recording and transcript; they will be available as usual on our website at www.metaco.com.
Thanks for joining. See you next time. Thanks, David.