A new crypto company backed by Peter Thiel is launching to solve one of the industry's biggest pain-points, and one trader said it 'brings something that others haven't brought so far'

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• Tagomi Holdings will begin offering prime brokerage services, a staple of traditional equity markets, to institutional crypto traders.
• The solution will include best execution, custody and post-trade reporting, among other services, in a complete package.
• Crypto traders say the move is a positive step towards attracting more Wall Street money into digital assets.
• However, small - but important - nuances between cryptocurrencies and traditional assets still exist that make an immediate influx of big fund investors unlikely, say some traders.

The crypto industry just checked off another box on its to-do list for attracting billions in Wall Street money.

Tagomi Holdings, a startup backed by investors including Peter Thiel, went live this week with its electronic prime brokerage services for cryptocurrency markets.

While prime brokers have long been a staple of traditional equities markets, offering a variety of services throughout the trading life cycle to large funds, they haven't yet existed in the still nascent crypto market. Crypto market experts have said that lack of prime brokerage services are one of the biggest pain-points keeping out mainstream institutional money.

Tagomi, which has raised $16 million in funding from Thiel's Founders Fund, Collaborative Fund, SV Angel and Joe Lonsdale, among others, offers best execution, settlement, custodian and post-trade reporting services to clients as part of one big package. While others companies in the crypto space have offered some of these services, Tagomi's offering is the first all-encompassing one, market participants said.

"Most of these clients are looking for better price execution," said Jennifer Campbell, cofounder and CEO at Tagomi. "It's folks who have seen, 'Hey, we have these tools in traditional equity markets and security markets. Where are these set of tools in this space?'"

The question of custody has long been a bugaboo for institutional firms interested in trading digital assets. The same custodian banks commonly found in traditional markets like State Street and BNY Mellon have yet to materialize in cryptocurrency. As part of the solution, Tagomi will partner with and assess the different custody solutions that exist in the space to offer secure transfers to a client's preference.

Read more: Crypto investors are complaining about the same 'biggest pain point,' and fixing it could add billions to the bitcoin market

Greg Tusar, a former Goldman electronic trading head who is now the cofounder and chief technology officer at Tagomi, said the electronic brokerage will eventually look into offering coin lending and margin trading services as those markets become more institutionalized.

"Being able to have an intermediary like Tagomi that incorporates the trading and the custody function together and wraps that up in one complete, end-to-end service is kind of how we see the starting point for prime services in digital assets," said Tusar in an interview. "Bringing some of the things that have been done in other markets but translating into something that is uniquely crypto, and in some ways is the same but in other ways is very different."

After seeing incredible growth towards the end of 2017, crypto markets have been hit hard in 2018. Bitcoin, which nearly touched $20,000 at the end of last year, has struggled over the last 12 months, dropping roughly 81% to $3,592 as of Wednesday.

Chris Hehmeyer, CEO at Chicago-based proprietary trading firm Hehmeyer Trading that runs a crypto trading desk, said he's potentially interested in becoming a Tagomi customer once he has more information about pricing.

If Tagomi's promises are true, "it brings something that others haven't brought so far," Hehmeyer said.

Prime brokers like Tagomi will help build trust for large funds who may have been nervous in the past about getting into the crypto space, he added.

"People like their trusted third party. They like their banks. They like their brokerage companies. They feel comfortable," Hehmeyer said. "These folks, it looks like, are trying to bring trusted third-party services to the digital space, the digital ledger technology area. That should definitely help bring comfort to the fiduciaries of the world, which is the where the institutional money is."

However, offering prime brokerage services won't necessarily lead to an influx of new institutional money, according to the global head of trading at one crypto trading firm.

While it's a positive step, prime brokerage services aren't the cure-all for easing big investors' worries about wading into the crypto waters, he said.

While Tagomi offers services around managing the custodian process for clients, there's still a larger issue with crypto markets generally. No custodian currently manages the full set of wallets a firm looking to trade a large book of cryptocurrencies would need. That requires firms to build a solution in-house, an option he said many firms considering trading digital assets would likely not be willing to do, he said.

Reconciliation can also be a problem, as some crypto products are structured in ways firms' middle and back offices might not have existing frameworks to manage, he said.

Fiat currency risk is another unsolved problem for the industry, the head of trading pointed out. Foreign exchange markets close at 5 p.m. ET on Friday, reopening at Sunday at 4 p.m. ET. If a firm were to conduct a trade on Saturday night between bitcoin and a fiat currency, it faces FX exposure because the reference rate hasn't been refreshed by banks yet.

But despite these concerns, prime services are a positive step in the crypto market's maturation.

"It is like seven yards on first down," Hehmeyer said. "That is a really good gain."

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