Interviewed By Emmanuel Daniel
Lars Holst, founder and CEO of GCEX, and Dusan Stojanovic, founding partner of TGV, discussed with Emmanuel Daniel the business model of the UK based FCA regulated digital brokerage, how it works with institutional and professional clients on crypto assets, and expansion into Europe, Middle East and Asia.
Lars Holst, founder and CEO of GCEX, aims to replicate the prime broking model employed by intermediaries such as Saxo to the trading of security tokens and cryptocurrencies. His experience with providing tier 1 liquidity to institutions in foreign exchange (FX) trading influenced him to bridge the gap between traditional finance and digital assets. Its “crypto in a box” platform is designed to provide one-stop digital broking services for institutions and professionals looking to enter the digital assets space.
Meanwhile, Dusan Stojanovic, founding partner of True Global Ventures that recently invested $4 million in GCEX, said the strength of the management team, its record of completing ventures and ability to operate a volatile crypto business clinched the deal for him. He also attributed the company’s growth to its strong institutional background.
The following key points were discussed:
Below is the edited transcript:
Lars Holst (LH): In FX, we do traditional prime broking. You come to us and say, “I want liquidity.” Then we can give you access to a number of tier 1 names where we have access to. We have a prime broker for clearing. So, we can do give ups, as it's called. But in the crypto world, there's no concept of prime broking and give up yet. We are essentially the prime broker across the market makers that we currently support.”
Dusan Stojanovic (DS): Two-thirds of his team, he's basically done three ventures with them. That is very impressive. Because then you know that they've gone through probably both paradise and hell. You kind of need that, especially in crypto as it's very volatile. You have one day where you believe that you are untouchable, and you have a superpower in the world. The next day, you realise that you are almost not worth anything. You need to be able to go through that volatility.
Emmanuel Daniel (ED): Today, I had the pleasure of speaking with Lars Holst, the founder of GCEX, an online brokerage playing in the wholesale investment banking aspect of the industry, and Dusan Stojanovic, who is my very good friend and a managing partner of a venture capital company that is invested in GCEX. I wanted to secure from Lars a sense of an idea of where the online brokerage, especially the wholesale side of it, the corporate side of it, the prime brokerage aspect of it, the investment banking aspect of it. Where is that trading? Is there anything revolutionary taking place in that front? How he as an entrepreneur sees a lot of the new technologies that are coming on stream that threatens to disintermediate the brokerage function in the online brokerage industry. So, let's get right into the conversation.
Lars Holst, you're joining us from London. Dusan Stojanovic, my very good friend, you’re joining us from Singapore. I'm here in Beijing. I've got a very interesting conversation to have with both of you. I look at Lars Holst, founder of GCEX. You have to explain to us what that does. An online brokerage and all of that. Also, your pedigree as an online brokerage investment banker in the good old days with Saxo Bank, which was an innovative company in its own right, and now founder of a new age, a transformational platform that is going to be transforming the space around the brokerage investment banking industry. So, let's get right into the conversation. Lars Holst, GCEX brokerage founder, tell us a little bit about GCEX.
LH: Thanks for organising. I guess my background is more traditional finance. And I guess GCEX is rooted in a lot of traditional finance. So, we started out and kind of said from day one, we want to be regulated and want to be regulated wherever we go. So also, in my previous companies, that has been the foundation of what we've done. So first up, we got the Financial Conduct Authority (FCA) licence, both for traditional finance kind of standard investment firm. Then we’re also on the crypto asset register and we are in the process of expanding that regulatory coverage to the EU and Dubai. Hopefully, with the help of TGV and their network, also into Singapore. Yes, there's no doubt about that. Of course, Singapore is really at the forefront of this whole digital transformation that we're seeing. I guess that was also one of the hopefully many points that attracted both me to TGV and TGV to us. In a nutshell, Emmanuel, I’ll say it's not really rocket science— what we do. We have some technology whereby you can aggregate pricing across multiple venues. Then you have some risk management and order management and then you spit out the price on the other side to the buy-side. Then you can trade and essentially exchange technology. Again, we cover some traditional products— foreign exchange commodities and exchange tokens, Bitcoin, Ethereum, etc. Anything essentially that moves. I think we have a lot of good ideas that we need to get cracking on, together with TGV for 2022 and going forward.
ED: Why did you call your company GCEX?
LH: We actually started out as Global Crypto Exchange. We were incorporated and founded as Global Crypto Exchange. But we actually struggled to get a bank account. I won't mention any bank names, because that would maybe be too aggressive. But as Global Crypto Exchange, we couldn't actually get an account in the UK with a high street bank. Then we changed the name to GC Exchange and then we got a bank account. We also registered GCEX as GC Exchange because GC Exchange is a bit long to say. Every time we pick up the phone, we just say GCEX.
ED: So, this whole idea of being a product-agnostic platform sort of grew over time. You started as a crypto exchange, and then you wanted to see what you could do. You could put any asset on it. You could put equities on it. You could put FX on it. Then the idea just grew.
LH: Yes, you might say so. I guess in the digital world, we started it almost three years ago. Foreign Exchange (FX) is the world's biggest market. They say Security Token Offerings (STOs) are going to be bigger than FX in the years to come. But we already said that two years ago, so I was actually very excited about STOs. I still am. That's inside the regulatory perimeter, but maybe NFT is going to overtake it. Who knows? I guess when you start out, you don't know. You have to be pretty flexible and go with the flow. I guess we also need to see what's next right now. The majority of the flow we get is kind of standard tokens— Bitcoin, Ethereum and any ERC20 token and then a little bit of Ripple as well.
ED: So, your core trading asset is basically cryptocurrencies and then you're building the effects and the other asset classes.
LH: No. The technology and us— we started out really with the foreign exchange as a product. I started helping in 1999, with FX, and we made all the mistakes that you see a lot of crypto guys do. So, we have scaled technology to much higher in crypto. The number of price updates per second is much higher in FX than in crypto. So, to add something that's less traded, has a much lower throughput, and requires much less bandwidth. Of course, it's easier than the other way around. So, we started with FX, and that's kind of our background and then we added products to that.
Regulation and technology attract clients and investors
ED: How different is GCEX? How different is that from Saxo where you were in the pioneering group of salespeople when it got its licence in the early 2000s? How different is that? How different are you from any number of platforms that are now offering this high latency or rather low latency transaction platform around the world?
LH: I think building technology needs to be stable, but there's a lot of good technology out there. TGV actually invested in an FX technology platform in Singapore as well. That probably can handle more throughput than we can. But they specialise in one area. It's the combination of the regulation and the technology that I think differentiates us. What's the difference from Saxo Bank? I left 17 years ago, but we are quite a few people here that have been with Saxo Bank in the past. According to the December update numbers, they focus a lot on equities, as do a lot of other people in the space, Robinhood, etc. We specifically do not do equities. I think instead of spending time and equities, I'd much rather go straight to security tokens. I really firmly believe that security tokens will overtake the kind of traditional trading market for equities and derivatives are yet to be seen.
Solid management team critical in a volatile crypto business
ED: Let’s ask Dusan. Dusan, what did you see that was attractive about Lars and GCEX? How does that fit into your overall portfolio? Where do you think he's taking the technology?
DS: Yeah, as you probably know, Emmanuel, we do look at our bets no matter what the stage is. The team for us is the most important part. Even if the company is like Lars’ company, which is actually profitable, it's still the team, which is number one for us. So, for us, we were basically impressed by the main entrepreneur, Lars, in this case for GCEX. But does he manage to attract a very strong and solid team around him? What we see here is, without going into a lot of level of details, but in like two-thirds of his team, he's basically done three ventures with them. That is very impressive. Because then you know that they've gone through probably both paradise and hell. You kind of need that, especially in crypto as it's very volatile. You have one day where you believe that you are untouchable, and you have a superpower in the world. The next day, you realise that you are almost not worth anything. You need to be able to go through that volatility. If you have gone through a couple of companies with ups and downs especially with a team, that's great. So, I think that's basically what we saw. He has managed to surround himself with a fantastic team. And quite honestly also, he has one key woman there as well. Olga has been around and worked together with him. For us, it is important that there is some kind of strong female representation at some stage in the organisation. I think we saw that. So, yes. It is the team and Lars himself. I would also add, even on the board level, that we could see that the board is not just sitting there to kind of roll and make some minutes and make some comments on the board members. They really want to be engaged, and they are. I think it's pretty impressive that he set it up in such a way So, the team aspect is all over the place there, Emmanuel. For us, that basically ticked all the boxes immediately. Now, the second piece that I would like to say is, I think he's at the right spot. He's at the right spot when this asset class started to become heavily institutionalised. Obviously, having a regulated background and an institutional background like he and his team have is perfect. Why not kick off a business like that in the UK? We've been in a relationship with the UK, and it’s not bad at all. It is still one of the largest financial centres in the world, and I don't think that's going to change anytime soon. What's good about international people living in the UK is that they look at Europe as one part that they want to expand into, but also the rest of the world. It's that kind of global mindset, which is important. So, I would say, the team, the right spot and basically the international expansion plan are the three things that got us really excited.
ED: I'm excited to have this conversation because I want to know Lars’ thinking about where this entire intermediation industry is evolving to? You’re at the frontier. You’re talking about NFT and so on. I'm thinking about Tezos and PancakeSwap becoming brokerages themselves. I mean little tokens doing the intermediation function. Where will that leave the platforms that companies like yours are building? So, I want to get there at some point. Let me ask you first. What are the critical success factors of online brokerage business that the one that you're running? I wanted to have a technology conversation, but from what Dusan just mentioned, he was impressed with the people element. Now let's hear from you, Lars, what do you think are the critical success factors of your platform business?
“Crypto in a box” offers one-stop digital brokerage services
LH: Well, if you want to get into technical details, I have to warn you, I'm not a technician by background. I know high level about technology, but I just want to forewarn you there. Well, I guess Robinhood is actually a good example. Of course, we would all love to be like Robinhood. I think Dusan and all the other investors would be over the moon if we got to that level, but again, that's another company that is focusing on equities. They're focusing on retail. I think we didn't touch upon that. We do not take any retail signs. That’s kind of at least my philosophy. I sold a company a couple of years ago, as well, where we also focused on professional clients. So, it's more the informed investor that can make their own decisions. There's also less regulatory risk by dealing with professional clients. So, that's at least one unique selling proposition (USP). Then you also said PancakeSwap. People could maybe skip the brokerage level. Yes, that's also possible if you really take time and you are a blockchain evangelist. It's actually pretty difficult to get started. That's probably the number one USP for us. We can tell people, “Hey, you don't need to go out and create your own wallet.” So, we only work with regulated custodians. That way, you don't need to worry about the theft of coins. They ensure they're regulated. It's safe. You actually get everyone and everything from a one-stop shop. That's us. The turnkey solution— we call it “crypto in the box.” So, you don't need to go all over the place. You can find Tier 1 liquidity, just like Robinhood. We can take care of both the fiat custody and the crypto custody. You need to only have one trusted and regulated counterparty and that's GCEX.
ED: Are you offering your platform as a white label platform to traditional banks or anyone who wants to have access to a platform? Is liquidity added in there somewhere? Is your success in providing liquidity one of the critical success factors?
LH: Yes. We definitely do white label big time. The turnkey solutions— we used to call it “broker in a box.” That was kind of a traditional white label phrase. Then we came up with this “crypto in a box.” We actually wanted to register the domain, “crypto in a box,” but then some sort of domain broker called me and quoted me $35,000 for cryptointhebox.com. I kindly declined. White labeling is extremely modular and very open. It comes with liquidity, but you can also source your own liquidity. So, we provide a list of exchanges where we have connectivity to market makers. They can do bilateral settlement, or they can use us as the prime broker for the settlement in the middle. So, it's very open and very flexible. We have banks doing white labeling and traditional brokers doing more crypto-focused progress. I'll be honest with you. We have not been super successful in positioning ourselves as a crypto exchange as such. It's really been traditional banks and brokers coming to us for trusted counterparty for their crypto business.
Expand the prime broking model to the crypto world
ED: What's happening to the prime broker world as a result of players like you?
LH: That’s one reason we were also looking to expand our capital base. It was to really execute on the prime broker vision for crypto. There is no concept of a prime broker in crypto today because it's not a standardised product. You can't find it on the standardised legal framework. Until that point in time, then there's just no interbank concept of prime broking. Even though I have read some articles about these organizations. They are about to add Bitcoin and Ether to the standard.
ED: You started at foreign exchange. So, I'm sure that there was prime brokerage involved there.
LH: Yes. So, in FX, we do traditional prime broking. You come to us and say, “I want liquidity.” Then we can give you access to a number of Tier 1 names where we have access to. We have a prime broker for clearing. So, we can do give ups, as it's called. But in the crypto world, there's no concept of prime broking and give up yet. We are essentially the prime broker across the market makers that we currently support. We also need to worry about counterparty risk, but we had exchanges and market makers. It’s kind of not daily but on an ongoing basis.
ED: But are you in a crowded space? There are several players. All of whom are building technology platforms. At the end of the day, it's the technology that determines whether you grow.
LH: I wouldn't say that. There's so much standardised technology. Again, taking your price in, doing some risk management or management in the middle and splitting out the price again— that’s pretty trivial. It's more that you can hook it up to wallets, that you can claim that you are regulated and that you can provide the liquidity. So, there are a lot of tech players that can only give you the tech and then you need to go out and find a prime broker. Then you need to go out and find a wallet or you need to go out and find fiat setups. So that's, again, where we make it easy for you. You can get everything from us from a one-stop shop, Tier 1 interbank FX liquidity and Tier 1 crypto liquidity.
ED: Do you think that greater liquidity and depth, in terms of types of liquidity, will eventually stabilise cryptocurrency? Given how volatile it is, how do you think that will evolve over time? How do you think that's evolving right now, in terms of who's in crypto and how the market is maturing?
LH: On one hand, we like volatility, because that usually means there's more trading. But too much volatility also scares away people. If it's too volatile, some institutional players probably deem it to be not super serious. So, it would be good that we could kind of calm down the volatility slightly. Even the introduction of bitcoin on CME has not been able to kind of put a cap on volatility. To put it into the perspective of volatility and bitcoin, it is kind of equivalent to the Turkish lira. I have nothing against the Turkish lira, obviously, but just to put it into perspective, it would be nice if it could calm down. I guess we need to see more names to come in as market makers, so they can kind of take the top of these wild swings out of the market.
ED: So, these market makers that you're talking to, aren’t they developing their own platforms? Aren’t they building their own networks? Their first job is to go around looking for clients. So, they are already quite aggressive in their own right. Why would they work with you?
LH: Tier 1 names — I’ll just mention Goldman Sachs. There’s a reason that you don't go to them directly because they only want people that aggregate and have a certain volume. We are, of course, that middleman. That's what I've been doing for the past 20 years. Saxo Bank also goes to Tier 1 names, even though it's a bank. It's deemed to be one of the biggest players in space. They also hitch with the interbank players because the clients of Saxo cannot go to the prime broker of Saxo directly. So, they need to have a middleman like Saxo. We have the same job in crypto. The market makers don't want to talk to hundreds or thousands of clients. In most of the Tier 1 names, you need to be regulated. You need to be regulated from a Tier 1 jurisdiction whereas, I can take a client on from Malaysia or Singapore, or elsewhere. We facilitate that in-between sourcing.
ED: How is your client base looking like right now? Who do you have as clients? This whole transition that banks are now wrapping their minds around crypto, or they want to provide some form of crypto service to their high-net-worth clients— Is that creating opportunities for you?
LH: We would welcome it. It would be great for us if even just one name would say, “Yeah, we are now supporting this. We are kind of giving this out to our clientele.” But unfortunately, at this point in time, it's still at arm's length. They're debating and they probably have some committee somewhere in the bank considering it. So, it's probably not going to be a 2022 project either, unfortunately. But it would be good for all of us and GCEX. We work actually with a couple of Tier 1 names, but I don't think I'm allowed to say who they are. What I know is that they can actually provide pricing, but they only do on a test basis to someone like us, so they have a proof of concept.
ED: Dusan, when you were doing your due diligence on GCEX, who else were you looking at to give you a sense of benchmarking on where they were in their journey? Where would you, as an investor, say they are in your journey? What are the milestones that you're setting up for them?
DS: We were looking at it to see if there was something like this in Southeast Asia because obviously, that's where the venture capital (VC) is regulated. We were trying to see, “Is there something like that here? Is the team strong enough?” We did a little bit of comparison. As Lars probably mentioned in his initial introduction, we have one of our partners, who is actually running a considerable FX business in Singapore, which has actually become global now, which is not competing with what Lars is doing at all. We were trying to see if there was something here that can actually really play that kind of institutional play. Yes, there are other actors, but I think what we were trying to look for were 100% institutions that know retail. Does it take off that? Number two, does it actually take off a platform? Lars hasn't mentioned it, but he also has the former CTO from Saxo Bank as his CTO. The platform is actually very good. Interesting technology. So, number one, is it 100% institutionalised? Is the platform really strong, but from an onboarding perspective, highly scalable? Yes. So, that was kind of the second point. Then the third point is, from a regulation point of view, does the company come from a highly regulated environment? So, that's the kind of three areas. Highly institutionalised, platform, regulation. Do we have something like that that we want to take a bet on? I would say, the market, in general, is very fragmented. Then for us, what was really the most important part, which we only found out, obviously, when we dug deep into GCEX, who are the main stakeholder partners that Lars has? He's been so long in the industry and GCEX that they do have access to fantastic partners within the financial services industry. So, that I would say is number four. What was our suspicion? Our positive thoughts about the team proved right when we started to dig deep into it. The deeper we basically dug into it, the more interesting it became. I think that's the last differentiator we didn't see on the surface that we only saw once we started to dig into the company. That's where we can come in or Lars’ company can come in and bridge that gap. They can try and pilot things immediately with a highly scalable platform. So, we are very excited about it. Not just for Europe, but especially for the Middle East and Southeast Asia. So yeah, when we were doing our benchmarking, we were also looking at the Middle East. I forgot to mention that. We were also trying to see what we can do in the Middle East as well because we are actually pretty strong in the Middle East. So, we believe that the market is very important. I think from our point of view, there are kind of three or four centres in the world. The US I am taking apart, but like Singapore, Dubai, Switzerland, and the UK. You have to be in those markets if you are talking crypto.
ED: Okay, but are there milestones that you’ve given them?
DS: You don't need to give milestones to your entrepreneurs. They set up themselves.
DS: Put it this way. They're that aggressive. So, it was more the other way around. “Can we really do all this?” As opposed to, “Can we do more?”
ED: What milestones have you given yourself, Lars?
LH: So, I want to get the EU licence. That's kind of on my to-do list this month. Then via Dusan or before him, we talked about Dubai, actually. We actually closed a deal while I was in Dubai in November. So, I think that's also an area and then we need to agree on when we need to initiate some things in Singapore. So that's kind of the 2022 milestones, then we need to streamline a lot of things. I think we are good at certain things. We can improve on all posts in the company. There’s no doubt about that. We’re rolling out a new front end and trading the front end. There's always something you could do, Emmanuel. When people say that they are done, then they're lying. I always wonder, we actually have something that works today. And still, we want to hire five more developers in Q1. That's just the nature of the beast. You are never done.
Regulators and poor execution present the greatest risks
ED: What are some of the risks in this business now that you're getting your licences? What are some of the risks in the current business model?
LH: Regulatory risk is always there. Regulation changes. We have seen that in FX in the years I've been active. You also mentioned Robinhood earlier today. They've also been fined. Of course, I feel sorry for them. They can afford it. There are always these regulatory risks that maybe you don't do anything bad or wrong on purpose. Regular risk is there. Trading risks, even though we're not market makers, we pass through everything to Tier 1 providers. There's some black swan event. I don't know if you remember the Swiss National Bank in 2015. That was the worst day of my life. The 15th of January. I remember clearly it was 9:30 in the morning. Everyone who has been in FX would remember that and where they were at that point in time. Of course, that's a risk to the business. I really think that the key opportunities outweigh any risks. We’re only at the beginning of this. We’re coming back to security tokens. We haven't even started on that journey. NFTs, we haven't even started on that journey. Now that GCEX has the help of TGV, we’re on to something. We're going to look at them in 2022. So, the risks— regulatory risks, liquidity risks. I really think that the biggest risk is that we execute poorly. So, God forbid, that we just need to keep on our toes.
ED: I started this conversation, wanting to get from you an idea of how intermediation itself is evolving, especially on the wholesale side of brokerage, trading and so on. The sense I get is, you're involved in the automation of the brokerage industry. The automation aspect is still underway as well as digitisation, which is putting a lot of the brokerage business on a platform. In the category of service providers that you operate in, there are lots of players and there's a lot of jostling that is taking place at the moment. You come out as one of the leaders because of your pedigree, your experience and also your ability to secure licences in the key markets. On top of that comes the technology and liquidity toolsets that you have access to. So, it seems to be the evolution rather than the revolution of the brokerage industry? Would I be correct to describe it as that? Or is that something that I'm missing?
LH: No, that's actually not a bad summary. I think combined with the custody side, that's the novel thing in digital. The clients can actually hold assets on their browsers on their phones. We have a secure environment. I think you missed out on a USP kind of counterparty risk. Now, we have an additional balance sheet. We have a partner like TGV, and then we have more partners lined up. So, people should not be worried about balance sheets or counterparty risks. They can safely trade with us in a secure regulated environment. Yes, it is crowded. There's also a lot of crap technology out there. A lot of people claim they do ABC, and maybe they do ABC half-baked. Maybe they are regulated in some obscure offshore jurisdiction where you don't know what powers regulators have if something should go wrong. Maybe you transfer your coins, or your fiat to some wallet, where you don't have any assurance about what's going to happen after that. So, there are a number of factors to consider when you choose a partner today. In intermediation, there are many aspects to consider.
ED: In fact, counterparty risk is something that I wasn't very sure if I wanted to go into. But that means that you need to be well capitalised. Then you get into the traditional banking business, in which you've got a balance sheet. Is there a temptation to have a balance sheet at some point? By the way, how well are you capitalised right now?
LH: Again, that's in the public domain. We just got $4 million from TGV. So, we’re taking out Tier 1 capital to between $8 and $9 million. We’re profitable. But more importantly, as I said, we don't do self-custody of the coins. So, you don't have a risk of anything happening to your wallet or your assets. They're separate and segregated. We try to kind of take away these concerns, the institutional concerns. Preventing more adoption of digital trading is the regulation, counterparty risk and safety of funds. All research says the same. Regulation, counterparty risk and safety of funds. We try to address them one by one. That's why I believe that we will also be the intermediation partner of choice going forward.
ED: Have you even started to look into that whole area of token-based trading? Lending against assets that seem to be defining DeFi right now. There are lots of activities on that front. It’s frontier territory. There are no one major players yet. Isn't it tempting to get into that area?
LH: We do. That's another benefit we have. We can also give some staking benefits. You can get yields on deposits, but we do it in a non-exotic way I would say. They stay in your wallet. We do it in a safe regulated environment. We only do it with regulated counterparties. I see one of our partners is also a potential portfolio company for TGV. I think it's good to kind of have a trusted ecosystem where we can operate.
ED: Great. I think you've answered most of my questions. I think I have a more realistic idea of how the industry is evolving. As I said, it's more evolving rather than revolutionising at the moment. You've added the new asset class, cryptocurrencies and so on. I'm sure you're going to be doing NFTs. So, it's an evolutionary phase. That's what I'm learning from you in terms of the digitisation of the brokerage industry. Gentlemen, thank you very much for sharing with me your thoughts. These conversations help me to map out in my own mind how the industry is evolving and how different components in the industry are evolving. In this case, it’s investment banking brokerage trading. Thank you very much.