Based in Zug, Covario is an independent Crypto Prime Brokerage for institutional investors covering cryptocurrency trading, custody, financing and other tailor-made solutions. Founder and CEO Mark Banner and CFO Patrik Gilli share their thoughts on the institutional crypto market in a conversation with CVJ.CH.
As digital assets increasingly enter the traditional financial world, their adoption by institutional investors largely depends on the existing infrastructure and service offerings. In the traditional financial world, prime brokers act as a one-stop shop for professional market participants, and are consequently establishing themselves in the cryptocurrency service industry.
Covario, a prime broker based in Zug, provides institutional quality services supported by proprietary technology focused on efficiency, scalability, security, and compliance. The company’s operating platform is connected to all major exchanges, market makers, and other solution providers to offer a single point of access for digital assets. The company’s clients include high frequency traders, hedge funds, asset managers, banks, and family offices.
CVJ.CH: What is prime brokerage and why is this service needed in the field of digital assets?
Mark Banner: In traditional finance, a prime brokerage is the service platform or the service package offered to professional investors to facilitate all of their trading settlement, custody or financing needs. As institutions expand into the field of digital assets, they need to get the same quality and level of service that they get in the traditional world: ability to execute without fear that their counterparties is front-running or trading against them, to leverage up their trades regardless of where they’re trading, or to manage risk on a whole portfolio basis. They need to be able to keep their digital assets safe from being hacked or lost. A prime broker provides these types of services to make sure that institutions are able to just focus on what matters more, which is of course trading in and out of markets.
Patrik Gilli: Institutional clients are used to these services from traditional markets, which is why we came up with the equivalent for the digital assets market. Most of our team members come from institutions in the traditional market and therefore we know exactly the needs and requirements of our clients.
At what stage of development is the global infrastructure and its regulatory framework in dealing with digital assets on an institutional level?
Mark Banner: The crypto industry has already reached a “hybrid” stage of development in which many of the market participants are sophisticated institutions requiring developed financial market infrastructure and a more certain regulatory framework, even while crypto native investors continue to value decentralization and innovation above all else.
Patrik Gilli: As an example, we have clients who can only trade on regulated venues and use regulated custodial service providers, and we have clients that only trade on DeFi protocols where they can invest in the tokens that offer exposure to new blockchain technologies. Because regulation is not harmonized across the globe we see that US institutions trade mostly on US-regulated venues while institutions across the rest of the world have greater flexibility with venue choice. Our platform is specifically built to meet all the different requirements from our clients.
How do you see the adoption of large investors / institutions in this area?
Mark Banner: In late 2020, we saw a watershed and floodgates opening up. Every major institutional investor is now looking at this space. Even some of the more esoteric or niche parts of the digital asset ecosystem are being investigated for opportunity by traditional investors. And clients of institutions are demanding it. Their limited partners or investors are demanding it and therefore, global asset managers are needing to offer it on their platform or as a service, because if they don’t, then they get shut out by others who do.
What are institutional clients mostly looking for in the space?
Patrik Gilli: Depends on the type of institution. For asset managers and small banks, it’s about finding an easy way to execute for their clients, get all the reporting they need and store the client assets in a secure custody solution. For the hedge funds or algorithmic traders, it’s more about a top-grade platform to work on – easy to plug in, no technological hassle – so that they can actually focus on their algo’s and strategies.
Where do we stand with regard to expansion of the infrastructure and regulation of crypto services in Switzerland, especially compared to other countries?
Mark Banner: Switzerland has a good story to tell in terms of both sound crypto market regulation and support for technology-agnostic market development. Switzerland has already addressed fundamental legal certainty issues around crypto asset ownership following events of default, insolvency or other circumstances. Recognizing global concerns around AML in the crypto space, Switzerland has established highly effective SROs (self-regulatory organizations) to help firms develop and implement effective AML/KYC procedures and developed a licensing regime for service providers that is proportionate to the level of sophistication and risk tolerance of the clients involved. Swiss regulators are also cognizant of the need to harmonize with EU rules to facilitate regulatory passporting.
Patrik Gilli: Switzerland is already quite established, advanced and forward-looking compared to other countries. When it comes to expansion of infrastructure, we now see a lot of companies coming to Switzerland. Even in Zug alone, per CV VC’s top 50 report, you see how this industry has developed, with a lot of crypto companies being established in Switzerland. They see the advantage of Switzerland from a regulatory perspective.
Do certain jurisdictions stand out with innovative product and service launches?
Mark Banner: When it comes to jurisdictions, you’re getting a lot of Swiss-based projects. Switzerland definitely has a place in the global ecosystem, alongside other major players that have successfully promoted their “FinTech Sandboxes” across Asia, US and Dubai. Switzerland has a very good track record in terms of crypto product innovation and is definitely innovative in terms of the foundational structure, road map or model for a lot of the token products. This goes back to early-stage pioneers like Ethereum (ETH) ten years ago, or exchange-traded ETF-like crypto funds, and today, a lot of projects including Polkadot (DOT).
Brokerage services originate from the traditional financial world, and several financial giants have emerged in this area over the decades. How will the digital assets sector develop and expand its services in the coming years?
Mark Banner: In the coming years, for digital assets, I would say that we should expect to see more sophistication of trading types and more support of high frequency trading opportunities. Overall more sophistication on the leverage and risk side. Brokerage services will start to consolidate to fully licensed and fully tier-one regulatory compliant offerings, and move away from the lower tier regulatory jurisdictions. At the same time, trading volumes should increase as a greater diversity of institutional investors obtain crypto trading mandates.
Patrik Gilli: As well as the technical aspects, a lot of the development will happen around regulation and compliance. There needs to be much more regulation in this space and for brokerages. For example, whether or not the same rules for traditional brokerages will apply to digital assets brokerages. And if there will be a set global standard that applies across the world. I think for large institutions it will be less about tackling the technical burden because you know, they can buy out companies to do a lot of the work for them. But from a regulatory compliance perspective, that is not something you can hand over to a third party. The biggest banks in the world will still need approval from officials, and the Federal Reserve Board will not grant permission until cleared from a regulatory and from a compliance perspective. This will be a focus area for financial giants developing their digital assets sector.
How do you see your business expanding in the future and why did you choose Switzerland?
Mark Banner: Building this company in Zug made the most sense in all aspects. We needed to find a place where we could predict what’s going to happen tomorrow, and feel safe in investing the money, time and resources. Switzerland had this early on, a Goldilocks zone of tier one regulatory framework, predictable legal structure, high quality talent and low tax. We knew that setting up this business must be compliance and regulation-first, and Switzerland was an obvious top choice.
As for global expansion, we are constantly identifying and looking at different markets and areas to expand into because Covario is a global business. However, Switzerland will always be the headquarters simply because of the support we’ve been receiving from the government, regulators and community which makes it just the best place to be headquartered.
Patrik Gilli: The ecosystem in the Crypto Valley is also a big advantage, especially the talent pool when it comes to recruitment. Covario is committed to fostering educational opportunities through partnerships and ongoing discussions with both students and professors at leading universities in Switzerland and abroad. Covario has now more than 30 employees in Zug with a great mix of financial industry veterans, experienced professionals, and young talents.
What differentiates Covario from other Swiss crypto service providers?
Mark Banner: Our team is best-in-class when it comes to this and knows exactly how to deal with our clients, coming from financial institution backgrounds. Our mission is to solve the problem of our clients with the best solution possible.
Patrik Gilli: A big difference is that Covario is fully independent. We are not a market maker or proprietary trading, but acting as an agency only. This way, we are focused on client needs first. We connect to all the major venues and liquidity providers, and offer different custody solutions in different jurisdictions, and subsequently let the clients choose the best solution based on their requirements.
Cryptocurrencies have also inevitably become a topic in the Ukraine conflict. Is this attention helping or hurting the general perception of cryptocurrencies?
Mark Banner: There has been more awareness of cryptocurrencies being used in various cases, whether for funding or money transfers. For instance, crypto has been an efficient conduit for making donations to Ukraine charities and this has provided positive PR for the industry. This is reflected in the broad crypto market rally since the war began, even while most other financial assets have underperformed.
This kind of awarenesses is inevitably good because we see the robustness of the digital asset ecosystem and how players have really come a long way since inception. Crypto players have come a long way to be more professional, in how they deal with and look at counterparties. The days of the Silk Road are clearly long gone, but you can do very positive things like fundraising for Ukraine quickly, while allowing people to avoid sanctions. And I think that’s just beautiful and amazing.
Mark Banner is CEO and Founder of Covario AG. For over a decade, he built and advised companies in financial technology as an entrepreneur and investor in Southeast Asia. Prior to founding Covario, Mark was the Director of the HK office for private equity fund Capsquare Asia Partners, responsible for portfolio exits. He started his career in Goldman Sachs as a Quantitative Strategist. Mark holds a Bachelor of Computer Science & Philosophy degree from Dartmouth College.
Patrik Gilli is CFO of Covario AG. A highly experienced Chief Financial Officer of listed, non-listed and family-owned Banks, Asset Managers and Trust Companies. Prior to joining Covario, Patrik was a Member of the Group Executive Committee of SIX-listed Bellevue Group and led the successful sale of Bank am Bellevue. Patrik graduated from the University of Zurich and is a member of the Swiss Chamber of Certified Public Accountants.