(Bloomberg) -- Citadel Securities-backed prime brokerage firm Hidden Road will stop offering its clients access to trading on Bybit, the third-largest crypto exchange by volume, according to people with knowledge of the matter. 

Hidden Road informed clients about the decision a few weeks ago, two of the people said, asking not to be named discussing sensitive information. The move was sparked by a disagreement between the two companies over Bybit’s know-your-customer and anti-money laundering requirements, the people added. 

Regulators in the US and elsewhere are tightening scrutiny of how crypto exchanges ensure they’re not being used for money laundering and sanctions evasion. Countries like Russia and Iran have used digital assets to help get around financial blockades imposed by Western nations. 

Dubai-based Bybit said in response to questions from Bloomberg News that it has started a “comprehensive compliance review” of its prime brokerage business. The review is aimed at ensuring compliance with relevant regulations as well as improving how customers are on-boarded by brokers, Bybit said without commenting on its relationship with Hidden Road.   

“Bybit will not comment on specific inquiries related to counterparties at this time. However, the company is committed to transparency and will provide further updates as the review progresses,” a Bybit spokesperson said in a statement. Hidden Road declined to comment. 

The exact nature of the two firms’ disagreement over KYC and AML procedures wasn’t clear. Prime brokers focus on institutional crypto traders, providing services such as execution, clearing and financing. They are a key source of liquidity in digital assets, where top exchange Binance accounts for roughly half of global spot trading volumes. 

“Prime brokerage is an essential piece of the puzzle when it comes to building efficient markets” in cryptocurrencies, said David Bachelier, chief executive officer for Asia-Pacific at crypto market maker Flowdesk. 

Binance’s Giant Settlement

The role of prime brokerage in crypto is under the microscope following Binance’s historic $4.3 billion settlement with US authorities last year. Regulators had accused Binance of allowing US-based VIP customers to trade on the international exchange through offshore entities, without implementing controls required by US law. 

In March, Bloomberg News reported that Binance had asked prime brokers including Hidden Road and FalconX to run more stringent checks to keep US investors off the exchange. 

Hidden Road provides prime brokerage across asset classes, including foreign exchange, precious metals and crypto. The company was founded in 2018 by Marc Asch, who previously worked for hedge fund billionaire Steven Cohen’s firms SAC Capital and Point72 Asset Management. 

It raised $50 million in a Series A funding round in 2022 from investors including Ken Griffin’s Citadel Securities, and Bloomberg News reported in April that Hidden Road was seeking additional capital at a $1 billion valuation. 

Bybit, which opened a new headquarters in Dubai last year, was the world’s third-largest centralized crypto exchange in the first quarter with 8.2% of the market, according to CoinGecko data. It has yet to receive a full Virtual Asset Service Provider license in Dubai, according to the local crypto regulator’s public registry. 

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