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Bosonic Tackles Counterparty Credit, Settlement Risk in Digital Asset Markets

Bosonic’s layer 2 blockchain infrastructure will be a clear player in digital asset markets because it addresses the key issues of counterparty credit and settlement risk, founder and CEO Rosario Ingargiola said.

The company draws from Ingargiola’s two decades of experience with building algorithmic, high-frequency trading platforms primarily focused on foreign exchange. That experience helps, as Ingargiola said FX is the best comparison for digital assets because there is no national exchange to centralize trading and there is massive liquidity fragmentation.

How Ingargiola’s FX Experience Shaped Bosonic

Prior to founding Bosonic Ingargiola said he developed a liquidity aggregation smart routing system that packaged 75 different liquidity sources like major banks, non-bank market makers and electronic communication networks running FX and delivered it to clients so they could transact on the aggregated liquidity. What made it work, he explained, was prime brokerage and credit intermediation. One could trade on that liquidity as a hedge fund but nobody on the other side had to take any counterparty risk. Top banks provided that credit intermediation through prime brokerage services.

Back in 2015 Ingargiola began looking at the cryptocurrency sector and saw a fragmentation and other similarities to FX and considered doing the same thing for crypto that he did for FX. But there was one problem – the absence of a prime brokerage in digital assets. That’s when Ingargiola had the inspiration to blend secondary market trading lifecycle technology with blockchain and smart contracts to create a system where participants do not need credit intermediation to eliminate that counterparty risk.

He also knew solving the problem had to be more than plunking a balance sheet function into this new environment.

“You can’t just have a pool of capital and say ‘I’m going to do credit intermediation’,” Ingargiola said. “Nobody can do that at the scale a Tier 1 bank can. I knew right of way it had to be a pure technology solution.”

Bosonic’s Value Proposition

Ingargiola began looking at blockchain architecture and quickly saw issues with scalability and limited throughput. That is because of the distribution over public networks and the fact they were all reading and writing to a single ledger. Given his background supporting high-frequency trading, he realized a multi-ledger approach was required. Seeing none available, he designed off of Bitcoin’s blockchain stack, one with the same unspent transaction output model as opposed to Ethereum’s account-based model. A few tweaks later and the Bosonic system was born.

“You get this natural logical sharding of the data and the reading and writing to those ledgers and that’s enabled us to approach those in a way that (for) the blockchain transactions the execution is actually happening on chain,” Ingargiola said.

It combines off-chain onboarding and on-chain, real-time execution with a digitally signed private key from clients that is validated and committed to the custodial blockchain ledgers. Significant to note it’s also non-custodial, whereas some other system designs increase liability through the requirement to custody those assets

“Bosonic allows everyone to keep their assets in their own custodians,” Ingargiola explained. “We give the custodians a solution that lets them create a node on our network and create blockchain ledgers for assets that they want to support.

“That’s our core value proposition. We’re not delivering a trading kit or solution to customers to run a node, it’s the elimination of counterparty credit and settlement risk.”

The Challenges of Being Early

It was interesting to have such a clear vision for digital assets so early on in the sector’s existence, Ingargiola admitted. While he knew he had the right vision he was frustrated because most early live traders were not worried about counterparty and settlement risk.

“But now they are,” Ingargiola said.

But that lack of structure and Wild West mentality continues to threaten the sector’s legitimacy, Ingargiola fears. Most institutional market participants are native to crypto and are embedded in a work flow of the bilateral credit posting of assets on retail exchanges

“I’m not sure if people understand the spiderweb of credit risk and buildup of what’s happening,” he added. “I think that’s being grossly underestimated and people are just making hay while the sun shines.”

Market makers are showing little interest in posting any collateral to back the other side, and Ingargiola said he believes that is the single biggest problem in scaling the space institutionally.

“Fortunately for us, even though we were a little early and it was a little painful the market is sort of coming towards us, and regulatory headwinds are coming towards us,” Ingargiola said.

Investor Protections Are Crucial, But There’s a Solution 

Those regulatory headwinds threaten to catch a few established players who have been thumbing their noses at regulators so far, he said. Acting and then begging forgiveness later isn’t a wise strategy. Again it’s just like retail FX was in the USA before it got regulated out of existence, Ingargiola said. There was plenty going on that shouldn’t have been without disclosures.

The other big issue the industry faces involves investor protections, Ingargiola said. Look at crypto’s history and half of its problems revolve around who has custody. Addressing that is key to Bosonic’s business model.

“We can give any exchange in the crypto space today the ability to run their whole business in a non-custodial way,” Ingargiola explained. “There’s absolutely no reason to run your business where you’re holding client assets not at a regulated, third party neutral custodian except that you’re doing things with those assets that probably ought to be disclosed and probably will get regulated away.”

Some in the cryptocurrency sector fear the current mood at the SEC is one that could at best stifle the industry and at worst drive innovation outside the United States. Ingargiola said he does not believe it will be regulated away as US regulators know they are in a tech arms race with China and the Chinese are way ahead. We need the innovation to stay here, but people have to play by the rules and public companies using investor funds must do the same.

“I think we’re going to see a lot of sanctions,” Ingargiola predicted. “I think anybody that’s running an exchange here that is trading more than Bitcoin and Ethereum is probably going to have a problem.”

Technological Roadmap

Bosonic is currently working on a lending marketplace which will allow anyone holding assets at any custodian on its network to make them available to lend without moving the assets from their accounts. Anyone that holds collateral on Bosonic in their own accounts can borrow that asset intraday on demand. It’s being implemented as a repo transaction that changes ownership legally at the time of the trade.

“The net effect is everyone who is transacting on Bosonic network, even if they’re trading on high leverage with a very small amount of margin, all of the trading counterparties are always fully funded intraday,” Ingargiola said. “And all that credit risk is shifted out to willing lenders who know how to price out that risk. We’re basically creating this whole open marketplace that lets us aggregate unlimited third party balance sheets.”

Also in the works is a virtual custodian that will allow investors to bring their own self-custody wallet to the Bosonic network and still be able to transact with anyone else atomically in the network even if they are at a brick and mortar custodian. For Bosonic the Holy Grail is cross-custodian net settlement capability. It’s built, but a coming phase will allow physical movement of residuals between custodians.

“It’s a two-phase process where we burn and reallocate the netted quantities and ultimately we’ll move the residuals by loading them into smart contracts and ultimately having one atomic transaction that does the burn and reallocation of the netted quantities and movement of all the residual quantities with no risk custodian to custodian on behalf of all the parties.

“What that means practically speaking is any custodian that joins our network… they’ll all be able to participate in our network by taking our free custodian solution, and all of the clients at those respective custodians will be able to trade with each other in real time with an atomic exchange of value and no risk to each other.”

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