An ever-increasing number of crypto companies (such as Coinbase, Uphold or Peter Thiel-backed Tagomi Systems) are acquiring broker-dealers or registering themselves as a broker-dealer with the SEC / FINRA. That is why we’ll devote this article to discuss what differentiates broker-dealers from regular crypto exchanges and which advantages they bring to crypto trading.
What is a cryptocurrency exchange?
Traditional crypto exchanges such as Binance, Poloniex, etc. work similarly to a stock exchange. Buyers and sellers place orders which are cleared using an order-book system, which defines the market price. The exchange acts as a platform / middle-man and charges a fee for each transaction.
What is a cryptocurrency broker-dealer?
With crypto broker-dealers, your funds are traded via their respective dealer network, as opposed to a single centralized exchange. These broker-dealers use various liquidity pools to provide trading opportunities at a predetermined exchange price. Broker-dealers facilitate trades on behalf of their customers, interact with the exchanges and handle the financial transactions between buyer and seller.
Broker-dealers allow crypto traders to…
1. Buy and sell securities
The US Securities and Exchange Commission (SEC) shows strong signs that most ICOs currently being launched will be deemed securities. A licensed broker-dealer is capable of offering blockchain-based securities, under the oversight of the SEC and the Financial Industry Regulatory Authority (FINRA). Using an alternative trading system (ATS), broker-dealers are eligible to offer the buying and selling of ICO security tokens and fractional equities to both retail and institutional investors.
2. Take advantage of arbitrage opportunities
Broker-dealers can take advantage of price differences across multiple exchanges and can therefore provide the best buy & sell prices to their customers. This means broker-dealers can enable their customers to take advantage of arbitrage opportunities which were so far exclusively accessible to institutional investors using sophisticated automated trading systems.
3. Trade custom currency pairs
Buying and selling on exchanges limits the options of an investor to the available currency pairs listed on a specific exchange. Having a broker-dealer as an intermediary party allows for custom currency pairs to be created. This eliminates the need to split a trade into two separate transactions (i.e. Token A -> Bitcoin -> Token B) in cases where the listing (in this case Token A / Token B) does not exist.
4. Exchange large amounts faster and without price slippage
Even the largest crypto exchanges are prone to price slippages if large trades are placed. This makes it more difficult to buy or sell at a predefined price and often requires placing multiple smaller orders distributed over time. With broker-dealers, large trades can be conducted at a fixed price with the settlement period generally being a lot faster than on an exchange.
1Konto (German for “one account”) is a cryptocurrency broker-dealer enabling access to multiple exchanges from one account in order to provide custom currency pairs, arbitrage and an intuitive dashboard. 1Konto saves traders time, money and headaches by bringing simplicity to the management of cryptocurrency portfolios and managing individual exchange liquidity.
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