Crypto Exchange Offers Credit Lines so Institutions Can Trade Now, Pay Later

LGO Markets is taking an unusual step for a cryptocurrency exchange by letting clients trade without pre-funding accounts.

The Hoboken, N.J.-based firm's clients, mostly crypto hedge funds and market makers, can now get an intraday credit line and send cash to the exchange when the trading day is over, CEO Hugo Renaudin told CoinDesk. For LGO, which now boasts over 50 clients (almost all of them institutions) in about 20 countries, the nominal end of the day is 10 a.m. Eastern time, Renaudin said. 

After passing a risk assessment, a client can get up to “several millions” of dollars in credit to trade bitcoin and then pay what it owes at the settlement time, he said. “They don’t have to park funds, there is no risk of a hack, it’s a scalable and flexible way to finance. We can extend these credit lines, and it works as a clearinghouse.”

Although it's commonplace in traditional financial markets, allowing trades without pre-funding is rare in crypto. According to Matt Trudeau, chief product and strategy officer at ErisX, LGO’s competitor, pre-funding is necessary to mitigate counterparty risk.

“Because both cash and crypto are already in the clearinghouse, we eliminate settlement risk for the counterparties. This also means all participants on our exchange can confidently trade with all other participants on our exchange without needing to know who they are, and assess their credit risks,” Trudeau explained.

To finance this service, LGO is using a combination of funds it raised in its 2018 token sale (which brought in 3,600 BTC, nearly $36 million at the time) and borrowed capital, both in fiat and crypto, from traditional banks and crypto lenders, Renaudin said. He wouldn't identify the lenders.

LGO is banking at the crypto-friendly Signature Bank and recently got financing from the market maker B2C2, which bought a share in the exchange this month.

The credit line is not the first unorthodox idea LGO has tried. 

When it launched in March 2019, Renaudin told CoinDesk that LGO wouldn’t keep clients’ funds. The plan was that users would maintain their own custody and trade via multi-signature wallets that required two out of three private keys to release funds.

A year later, LGO quietly abandoned the idea. The reason? Institutional clients, who are the exchange’s target audience, don’t want to take care of their keys, Renaudin said last week.

“Most of the volume is made by crypto-native institutions, like hedge funds, and they are used to using custodial platforms,” Renaudin explained.

Having funds with a qualified custodian helps the institutional players sleep at night, he said, so LGO’s clients can hold their funds either on the exchange itself or use BitGo, which partnered with LGO in April 2019. 

Another idea, making its own hardware wallet, which LGO was planning to release some time in the summer of 2019, also got scrapped, Renaudin said. For the same reason: no client demand. 

“All the bells and whistles we talked about last year, they were good, but when confronted with the market, we saw the demand was not there,” Renaudin said. 

LGO has also decided not to pursue a number of licenses as originally intended. These include a New York BitLicense, a FINRA broker-dealer license and a National Futures Association broker license. All this is on hold now, Renaudin said.

LGO decided to focus on the more familiar jurisdiction of France, where Renaudin and other members of the team hail from. The exchange has applied for a digital custodial license there, Renaudin said. LGO is registered as a money services business (MSB) in the U.S. with the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department. 

However, one idea from the early days survived: broadcasting LGO's trades (both the fiat and crypto sides) to the Bitcoin blockchain. A list of these trades can be seen on the LGO website.

According to this page, LGO has processed some $33 million worth of trades so far in April, $138 million in March and $96 million in February.

UPDATE (14:46 UTC, April 27, 2020): A previous version of this article mistakenly said LGO banked at Silvergate Bank instead of Signature Bank.