Case Study: Crypto Portfolio Management
FalconX is a blockchain, cryptocurrency, and fintech company focused on cryptocurrency brokerage and digital asset trading platforms.
FalconX wanted to build an institutional-grade portfolio management system (PMS) for crypto assets that would be able to support all of the services required for their growing user base including account opening, multiple asset classes, intraday trading, and performance reporting. But they did not have the necessary expertise or industry knowledge in-house.
The company turned to Softlab360 to help them develop an end-to-end platform that met their detailed requirements. Softlab360 managed the complete design and deployment and provided full implementation onto the FalconX AWS cloud.
Softlab360 also provided FalconX with the design and development of a portfolio management system for crypto assets with custom-built API.
In addition to participating in a number of system improvements on the AWS cloud, and providing full implementation support, Softlab360 provided FalconX with the design and development of a portfolio management system for crypto assets with custom-built API.
Softlab360 also provided crypto assets pricing service that updates prices of all cryptocurrencies in a securities product master, followed by valuation of the crypto asset positions held in clients’ accounts at FalconX. All portfolios are assessed for daily gain/loss, with financial reporting available throughout the current day, and with historical dimensions. On a daily basis, our implementation handles data feeds from exchanges, trading systems and custodians to post trade transactions, borrow transactions, and loan repayments to maintain accurate books and records inventory of account holdings. Post transaction posting, processes of reconciliation of position holdings and accounts takes place.
BUILDING A TEAM OF ENGINEERS TO ENHANCE PRODUCT SOFTWARE AND INCREASE REVENUE
DEGREE OF DIFFICULTY: 9/10
Create robust portfolio management system for crypto assets
Offer efficient pricing updates for client-held securities
Implement a comprehensive risk management framework for crypto assets
The Problem
Gary Gensler has declared that the Wild West days of crypto are over!
Digital tokens have now transitioned from a shady and highly risky investment to legitimate securities in the eyes of the SEC. This will require wealth management firms to take the same steps in managing these assets that they would for any traditional investment.
But there’s one problem. In the race to innovate in crypto, little was done to build portfolio management platforms that support it. After all, most of the crypto world was running away from traditional finance and regulations, not toward it.
Now that crypto is making its way into more investor portfolios, financial advisors need dependable and compliant tools to help manage these assets. FalconX, a leading crypto trading platform for institutional investors, is attempting to bridge the gap between crypto and traditional finance.
Their efforts were not without challenges, though. The company’s pricing update system and risk management framework weren’t robust enough to support the ever expanding regulatory requirements. Additionally, their portfolio management platform was having trouble supporting their asset growth.
The Vendor
The status quo was not an option for FalconX. In order to grow and stay ahead, the firm needed a platform that could scale gracefully while minimizing risk. While most might look for a prebuilt solution, FalconX understood that one size doesn’t fit all and that a custom-built platform would be best.
FalconX wanted to partner with an experienced outsourced development partner that could build the comprehensive solution needed to address their issues. They turned to Softlab360.
The Solution
Softlab360 embarked on a multifaceted approach to address FalconX's challenges, addressing FalconX’s pain points. This included building a custom-built portfolio management system, enabling accurate real-time pricing data, rethinking FalconX’s risk management strategy, and developing efficient data management processes.
Focusing on these four core areas, Softlab360’s work helped FalconX stay ahead of its competitors.
The Buildout
The decentralized nature of crypto means that their ubiquitous software tokens trade more like a commodity than securities. The SEC has disagreed in the past while the CFTC does consider crypto to be commodities.
Traditional portfolio management systems are built to handle securities, not commodities, so Softlab360 designed and developed a cutting-edge system tailored specifically for crypto assets. This system offered seamless access through a custom-built API, enabling FalconX to efficiently manage and track their clients’ crypto assets.
For the S&P500 index, average intraday volatility is between -1% and +1% with 5%+ corrections multiple times a year. You can feel pretty confident that the price you’re seeing will be pretty close to the price you’ll pay at the time of the trade.
The protections that exist to keep stock and ETF prices stable don’t exist on crypto exchanges, which is why cryptocurrencies are incredibly volatile. Bitcoin saw its price rise by 2,000% in 2017 to over $25,000 and then crash by 80% to under $5,000 in 2018.
To help monitor volatility, Softlab360 developed individualized system services that continuously receive pricing data for securities held in FalconX client accounts. This provides more timely data for advisors to ensure that they are always aware of the latest prices.
Lowering the Risk
Crypto is inherently risky, and not only for its price volatility. A lot of questions remain over just how different cryptocurrencies will be regulated, their utility, the management of the tokens, and even if they actually have any value at all.
A recent article in Forbes, From Speculation To Fake Swords, Cryptocurrency Struggles For Use Case, explains that many crypto tokens are useful only within their closed ecosystem:
“The reality in today's emergent blockchain technology is that data monetization through services against fiat has gone one step further and turned to tokenization.”
“You buy the governance token within a specific project or ecosystem because that blockchain is growing and users want or need the token to do business there.”
The existence of thousands of different tokens with different governance structures, usages and pricing increases client risk.
FalconX requested a customizable risk management framework, so Softlab360 started with a traditional investment method, Value at Risk (VaR), and modified it to support crypto assets. Looking at factors of the token contributing to the amount of loss and the probability of it occurring within a certain time frame, FalconX can now effectively monitor and mitigate risk associated with crypto assets.
Improved Data Handling
Based on the requirements, Softlab realized that this system will generate significantly more data, requiring solid data-handling procedures to ensure compliance, accuracy, and availability. This involved a two-pronged approach.
First, they established a daily process to receive transaction feeds and account information from the custodian. Instead of downloading a local copy, they opted instead to subscribe to the central security master and maintain any customizations separately. This ensures the integrity of the data, as the changes aren’t made to the security master itself.
In addition, Softlab added a rigorous reconciliation process to ensure accuracy and reliability. This reduced the risk of non-compliance, and potential fines or reputational harm, and contributed to a significant decrease in risk exposure.
Partnering with Softlab360 brought real results that positioned FalconX for future success.
The Results
- FalconX gained a state-of-the-art crypto portfolio management system, enhancing its ability to manage and monitor digital assets.
- Softlab360’s real-time pricing updates gave FalconX clients more accurate and up-to-the-minute information about their holdings.
- By basing risk on VaR, FalconX can now assess and mitigate risks associated with crypto assets quickly and efficiently.
- FalconX’s enhanced reconciliation process ensured better data accuracy and reliability, enhancing FalconX's operational integrity.
Crypto moves fast, and companies like FalconX must stay ahead of the curve. By partnering with Softlab360, FalconX not only streamlined its operations but also reinforced its position as a leading institutional crypto trading platform.
Through a continuing partnership with Softlab360, FalconX can meet the dynamic demands of the crypto market with confidence and precision, ensuring the highest level of service for its clients.
Are you struggling with crypto? Softlab360 has the expertise and proven success that allows you to offer crypto to your clients easily and with minimal risk.
Ask for a demo today.