Analysis

AAX, a Hong Kong-based cryptocurrency exchange that uses the London Stock Exchange (LSE)’s matching engine technology, has officially launched.

After 19 months of development and testing, the company said on Thursday that the exchange platform has gone live on web and mobile, targeting retail and institutional investors with spot, futures and over-the-counter peer-to-peer trading.

The LSE said previously that AAX would be the first crypto exchange to utilize its Millennium Exchange matching engine, which also powers major equity markets like the London one itself and the Hong Kong Stock Exchange.

In addition to crypto-to-crypto spot trading, AAX expects the derivatives market to be a major focus with its offering of perpetual contract futures settled in bitcoin. These contracts, which have no expiration date, will be tied to the performance of five digital assets – bitcoin, ether, ripple, litecoin, and EOS – with up to 100 times leverage.

AAX claims that with the LSE’s matching engine, it can settle futures trades at an average speed of less than 0.0005 seconds. To put that in perspective, Binance advertises a low-latency settlement of 0.005 seconds for all its current and upcoming products on Binance Futures.

“LSEG Technology is delighted to have successfully deployed our world class matching engine capabilities at AAX. This is the first time that Millennium Exchange has been deployed in the cloud, bringing its, scalability, flexibility, reliability and seamless direct market access to AAX,” LSEG Technology’s CIO Ann Neidenbach was quoted as saying in a statement.

Thor Chan, CEO of AAX, told CoinDesk that the firm started in March 2018 without raising money from external investors, using its own capital to support a now 100-person team, of which 60 percent are developers.

The exchange will take a hybrid approach to the custody of customers’ digital assets, combining its own in-house storage solution and third-party institutional custodians.

Asia’s Bakkt?

Chan said he believes the partnership with the LSE will expedite the process of on-boarding institutional clients especially from the traditional financial sector for AAX’s spot and futures services.

He added that working work with the LSE will allow AAX to gain access to the stock exchange’s exclusive partner network that consists of over 300 major banks and financial institutions.

Michael Wong, COO of AAX, told CoinDesk:

“We are in the progress of discussions with major institutions both from traditional markets and crypto markets as well. … We have a number of live conversations going on with serious institutional clients right now. But unfortunately, I’m not allowed to disclose any names at this point. “

Earlier this year, Intercontinental Exchange, the parent company of the New York Stock Exchange, launched Bakkt, a long-awaited market for physically-settled bitcoin futures targeted at institutions. Chan said Bakk’ts tiered system, which requires registered brokers to serve as middlemen, could be a hurdle to widening its client base.

That is where he believes AAX has an edge.

“It’s different. Bakkt has physically delivered contracts. So they need to have a broker network to help do the settlement. It’s actually a barrier for them to acquire users,” Chan said.

On the retail side, AAX uses a similar strategy to exchanges like Huobi or OKEx by enabling peer-to-peer OTC trading as a fiat on-ramp supporting Chinese yuan, U.S. dollars and Hong Kong dollars.

“For us, we don’t provide any fiat deposit or withdrawal methods for the users,” Chan said. “We are not allowed to take deposits or withdrawal from mainland China. That’s not compliant to do so. But if it’s just a peer-to-peer deal, it’s something allowed in mainland China.”

Futures warning

AAX’s launch comes just a day after the Hong Kong Securities and Futures Commission (SFC) released a warning on exchanges that offer cryptocurrency futures trading in Hong Kong.

Companies or individuals who offer crypto futures contracts without a proper license or authorization may be considered as breaching the regulation in the city depending on the product structure, the SFC said, adding:

“Any person who operates a platform that offers or trades ‘futures contracts’ is required to be licensed or authorized under the SFO unless an exemption applies.”

The SFC has not licensed or authorized any person in Hong Kong to offer crypto futures and added given the risks associated with this type of products, it “would be unlikely to grant a license or authorization to carry on a business in such contracts.

AAX’s current Terms of Use states that it will not offer services to users from various jurisdictions including the U.S., Venezuela, Iran, Iraq, North Korea, or any other countries sanctioned by the U.S. or the EU, though it does not include Hong Kong users in the restriction list.

In a response to the SFC’s latest warning, the company said:

“We welcome the SFC’s latest guidance on virtual asset futures contracts. We are now studying very closely whether any of the instruments we offer fall under the SFC’s guidance. AAX has always envisaged operating in regulated markets for cryptocurrencies that encourage innovation but that also provide investor protection and we will take appropriate steps to ensure we are operating within all applicable regulations in all the markets where we are active.”

Thor Chan image courtesy of AAX

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