Crypto startup Alpaca targets prime brokerage technology market

NEW YORK: As cryptocurrency platforms push into stock trading, a brokerage technology startup is preparing to enter a Wall Street business long dominated by major banks – financing trades for hedge funds and other large investment firms.

Alpaca, the startup that provides trading and custody technology to financial institutions, plans to launch a prime brokerage business in the first quarter of financial year 2027, chief executive officer Yoshi Yokokawa said.

The company is seeking to capitalise on growing demand for services that allow investors to trade across cryptocurrency platforms and conventional stock markets.

“Why do we need a prime broker to begin with? We need capital efficiency,” Yokokawa said on the sidelines of the Token2049 conference in Singapore.

Prime brokers provide large investors with financing, custody, securities lending and other services that allow them to run positions across markets without having to fully fund every trade separately.

Their role could become increasingly important as investors seek to trade a tokenised stock or crypto derivative on one venue while hedging the exposure elsewhere. Alpaca is not the only crypto company to recognise the opportunity.

BitGo said last week it wanted prime brokerage to become the main engine of its business, while Coinbase, the largest US crypto exchange, said it is seeing rapid growth in its prime operations.

Alpaca, headquartered in California, has a sizeable role in the tokenised equity market. Its custodies more than US$3.5bil of underlying US shares backing the tokenised products of more than 10 issuers, including Binance Holdings, Coinbase Global and Crypto.com, Yokokawa said.

He said the value of those holdings has grown about eightfold from a year earlier.

Prime brokerages can help firms trading across crypto and traditional markets to bridge a timing mismatch.

Crypto venues often require trades to be pre-funded, while US securities typically settle later, creating funding gaps.

Yokokawa said Alpaca is working on making tokenised stocks more easily convertible into the shares they represent.

“If we are talking about digital assets and tokenised stocks, it’s not really yet seamlessly getting converted into the underlying stocks,” Yokokawa said.

Without that link, traders may be unable to hedge or exit positions quickly, forcing them and their lenders to hold more capital.

“Once conversion is reliable, balance sheet financing from prime brokers becomes more useful,” he added.

“We have to solve this interoperability first, in terms of redemption and minting, before we start adding more leverage into this transaction,” he said.

Alpaca is also exploring ways to offset what trading firms owe one another, reducing how much collateral must be posted for individual trades, much as clearinghouses do in traditional markets.

Alpaca’s prime brokerage push will require greater balance sheet capacity.

The company raised US$135mil in equity and US$300mil in debt earlier this year.

Yokokawa said the firm doesn’t plan to simply earmark a fixed portion of its equity capital for prime brokerage.

Instead, it expects to use a mix of its own balance sheet, debt and credit lines, much like established prime brokers.

“It may be coming from your balance sheet, it may be coming from debt, it may be coming from credit,” he said.

The broader opportunity, Yokokawa said, comes from what he sees as the gradual collision of crypto and traditional finance.

“We used to have everything on paper. They moved to the computer, and now everything is about to move onchain,” he said. “I think it’s going to be both worlds colliding.” — Bloomberg