Blockchains may be built around transparency, but the crypto industry has a long way to go in building trust, especially when it comes to trading. Poor management and conflicts of interest brought down some of crypto’s biggest firms, including the hedge fund Three Arrows Capital and Sam Bankman-Fried’s Alameda Research, setting off a domino effect from which the sector is still recovering.
Joshua Lim and Shiliang Tang, two crypto veterans, aim to build a new kind of trading platform that can serve the flood of institutional money coming into the sector, while also steering clear of its earlier mistakes. Their company, Arbelos Markets, will provide liquidity on trades to firms like hedge funds and venture capital firms, serving as the counterparty for popular products like options and futures. Arbelos raised a $28 million round led by Dragonfly with participation from FalcolnX, Circle, Paxos, Polygon, and Deribit, Fortune has exclusively learned.
“As crypto matures to become a global asset class, it requires sophisticated primary dealers of risk that can sit and intermediate trades,” Lim said in an interview with Fortune. “We’re hopefully supplying the infrastructure to do that.”
Full circle
The crypto industry began with the January 2009 launch of Bitcoin, with early exchanges offering spot trading of the young asset. As the sector matured and new cryptocurrencies emerged, trading became more sophisticated, replicating traditional markets through more esoteric instruments called derivatives, which allow financial contracts based on underlying price movements. Popular crypto derivatives include futures, which obligate counterparties to purchase (or sell) an asset at a specified date, as well as options, which give traders the option to buy or sell an asset at a specified date and price.
Lim and Tang both started their careers in traditional finance before moving over to crypto. Lim served as a vice president of trading operations at Circle and headed trading strategy at Galaxy Digital, the merchant bank founded by Mike Novogratz, before becoming the head of derivatives at Genesis Global Trading, part of Barry Silbert’s crypto empire Digital Currency Group. Starting in 2017, Tang served as the chief investment officer and managing partner of LedgerPrime, a crypto hedge fund acquired by FTX.
Both became enmeshed in the world of over-the-counter trading, where counterparties agree on terms through bespoke contracts, rather than using an exchange like Binance or Coinbase as an intermediary. They also had a front-row seat to the critical failures of the last cycle in crypto, which Lim attributes to a lack of transparency leading to concentrated risk across the industry. Many traders used the same counterparties, including Three Arrows Capital and Alameda Research, and participated in similar trades, meaning that single failures caused systemic shockwaves.
They understood that the next cycle would need a better actor that could sit on the other sides of trades but that did not bear the same flawed risk profile that damaged counterparties, including Lim’s former employer Genesis, in 2021 and 2022. “Crypto has to grow a couple of orders of magnitude in order to become a permanent fixture of macro allocators’ portfolios,” Lim told Fortune. “To do that, there has to be effective risk transfer mechanisms between the large market participants that are trading crypto today.”
‘Where the market needs to go’
According to Lim and Tang, Arbelos Markets will mostly focus on derivatives and over-the-counter trades for institutional players. This sets it up to become a rival to crypto native traders such as Cumberland, a subsidiary of DRW, as well as traditional firms that entered crypto such as Jane Street, the former employer of Sam Bankman-Fried. Derivatives trading dominates volume on centralized exchanges, and many firms turn to over-the-counter trading because of the risk and credit advantages of counterparty transparency.
While Arbelos closed the funding round in the middle of 2023, it has since operated largely in stealth mode, with much of the capital coming in the form of debt financing to facilitate Arbelos’s ability to trade. The other focus has been building a “transparency engine,” which Lim said is modeled after the on-chain capabilities of crypto. While the firm does not plan to share all of its data with customers, it will provide key information, such as portfolio composition and where assets are held, so that clients can verify Arbelos’s risk profile.
The team currently has 12 employees, with most on the engineering side and coming from a quant trading background. Arbelos operates offshore through the British Virgin Islands, where it is applying for a license, and will not be available in the U.S. The firm has facilitated around $25 billion in notional trading volume since launching in the third quarter of last year, making it one of the top liquidity providers in crypto.
Rob Hadick, general partner at Dragonfly, decided to invest in Arbelos because of Lim and Tang’s track record. “There’s probably nobody more credible in options and derivatives,” Hadick said. He was sold on their pitch of reinventing the way that financial services works in crypto to help the sector build toward the maturity of traditional finance. “That, to me, is clearly where the market needs to go,” Hadick told Fortune.
This story was originally featured on Fortune.com