SBI to take $30mm stake in B2C2

Japanese financial conglomerate SBI is acquiring a $30mm minority stake in B2C2. The strategic partnership will accelerate the expansion of the two firms in the crypto market and increase their presence in traditional ones.

Financial institutions are morphing into tech companies and vice versa. Through this deal, SBI will have access to B2C2’s tech, notably its state-of-the-art e-dealing platform. In return, B2C2 will benefit from the financial firepower and distribution capabilities of SBI, owner of Japan’s first digital bank and largest online brokerage, as the liquidity provider of choice behind SBI’s crypto offerings to its millions of customers.

Our vision for the evolution of the crypto market was laid out in my speech at Consensus Invest 2017. We had hoped that by now a prime broker would have emerged to provide funding and credit intermediation between B2C2 on the one hand and our institutional clients and trading venues on the other. Yet the prime offering remains underwhelming. It hinders our growth, that of our clients, and institutional adoption. So we concluded that, as B2C2’s existing secured financing operation was already lending hundreds of millions of dollars, we are best positioned to address that gap in the market ourselves.

Most such endeavours have failed thus far because of the following missing ingredients: (1) an active client base to reach critical mass; (2) sufficient balance sheet and (3) proper know-how.

Firstly, there’s distribution. B2C2’s crown jewel is its institutional client franchise, the most valuable in crypto. Many attempts in the prime segment did not reckon with the rapid rate of margin compression that linked survival to the ability to charge minuscule fees on gigantic volumes. We will continue to attract the required volumes at the right price, which may be an order of magnitude lower than current levels. Not losing sight of the fact that lending remains a retail product today, B2C2 will also form the bedrock of SBI’s offering to its retail clients.

Secondly, our partnership with SBI brings together B2C2’s asset liability management framework — the most sophisticated in the industry — with SBI’s balance sheet, which is far larger than anything committed to the crypto market globally to date.

Thirdly, more often than not, the requisite know-how is also missing: few people in crypto have any experience of prime brokerage. B2C2 has a world-class team, drawn from tier 1 investment banks, who worked in prime brokerage, repo and FX swaps. That is where I spent the bulk of my conventional career and I look forward to contributing to that effort personally.

So much like B2C2’s 2019 entry into the US spot market accelerated spread compression, we hope to change the competitive landscape in the prime segment by cutting costs thanks to automation. Next month, we will unveil a fully automated facility with a view to providing the most competitive two-way prices in the funding market.

Today, institutional funding business is still done via spreadsheets. Two years from now, we will look back and wonder how so many crypto businesses managed to operate without automation and a proper separation between execution, settlement, financing and custody.

Our industry has often had to do more with less, and that gave birth to interesting innovations (such as 24/7 operations including weekends) — some of which are applicable to conventional markets. Our partnership with SBI will take us further in that direction. For example, B2C2 has been providing liquidity in foreign exchange during weekends and holidays since Q4 last year and we expect this offering to continue to grow rapidly.

A wealth of opportunity lies ahead for B2C2 and its clients. The value chains of conventional markets are richer than their crypto equivalents. This will change as our industry becomes more complex. Gone will be the days when an exchange would simultaneously be an execution platform, clearing house and custodian. In the context of that evolution, we hope to serve the needs of our clients ever more efficiently.