Markets
Credit intermediation, capital efficiency needed in cryptocurrencies
Cryptocurrency trading is generally pre-funded, so credit intermediation, in the form of prime brokers, and capital efficiency are needed for the asset class to be adopted by traditional financial institutions (TradFi).
A panel discussed the institutionalization of exchanges and their evolution at the Tradetech DigiAssets conference in London on May 15. Participants agreed that the collapse of cryptocurrency exchange FTX led to a necessary fight for quality as it highlighted the importance of diversifying counterparties, the requirement for institutional-grade technology and the need for regulated custodians.
Chantal Bradford, Deribit
Chantal Bradford, head of institutional sales EMEA at centralized cryptocurrency options and futures exchange Deribit, said during the panel that more traditional financial institutions (TradFi) are entering the cryptocurrency market. As they become more active, they ask more and more questions, such as how locations are managed and controlled, how funds are segregated, whether they are regulated in a credible jurisdiction, and resilience.
Bradford went on to say that Deribit was connected to a network of third-party custodians before the FTX collapse, but customers weren’t using them and now that has changed.
Block trading volumes on Deribit have increased by 10% to 35%-40% since Bradford joined the firm in February 2022, which she says has highlighted the growth in institutional trading. She went on to say that tradFi institutions are making investments in crypto-native companies instead of trading themselves.
Banks typically provide credit brokerage and prime brokerage services, but regulations currently do not allow them to trade spot cryptocurrencies. A comparison was made with the foreign exchange market, where the rise of prime brokers in the market has led to hedge funds and market makers overtaking banks as the main liquidity providers, and to a huge expansion in trading volumes.
“Prime brokerage needs to improve as institutions don’t want to connect to 20 exchanges,” he added. “Prime brokers can take on foreign exchange risk and improve capital efficiency for institutional adoption.”
David Newns, CEO of SDX, the blockchain-based exchange owned by Swiss SIX Group, agreed on the panel that capital efficiency is key for institutions.
David Newns, SDX
“AsiaNext enables intraday margin payments, even hourly, and enables cross-margining between cash and futures trading,” he added.
Newns is also president of AsiaNext, the Singapore-based digital asset exchange that launched crypto derivatives trading earlier this year. AsiaNext is a joint venture between Japan’s SBI Digital Asset Holdings and SIX Group. AsiaNext also aims to launch trading in digital securities, tokenized real-world assets and sustainability-focused listings.
Bradford added that Deribit also allows for portfolio marginalization. In February this year Deribit said in a statement that it had integrated with Fireblocks, a provider of self-custody technology, to allow trading firms and asset managers to trade on exchanges from an on-chain wallet, eliminating risk of counterparty.
Regulation
Newns said regulatory divergence in a multipolar world will influence the evolution of the cryptocurrency market.
He highlighted that the Swiss regulator has been working with the industry for many years to provide a framework for digital assets and encourage innovation. For example, in March of this year two Swiss digital bonds settled on SDX using a wholesale central bank digital currency (wCBDC) that is part of the Swiss National Bank’s Helvetia III Project.
Jorge Familiar, treasurer of the World Bank, said at a Swiss National Bank event that the organization is considering issuing a digital native Swiss franc bond, which could be settled using a central bank wholesale digital currency , according to Ledger Insights.
In the Middle East, the Deribit Group’s Dubai entity said in a statement in April this year that it had become the first derivatives exchange to receive a conditional virtual asset service provider (VASP) license from the country’s regulatory authority, covering both spot and spot contracts. derivatives trading. The license is not operational until the enterprise fully meets all remaining conditions.
At the same time, Deribit said it was moving the company’s global headquarters to Dubai and appointed Luuk Strijers, previously commercial director, as chief executive.
Bradford said: “We are also applying for a MiFID license in the European Union. Deribit’s business is 80% institutional and more and more TradFi institutions are coming on board, which we expect to continue.
Also in the Middle East, Abu Dhabi has approved Coinbase Asset Management’s Project Diamond, the US-listed cryptocurrency company’s platform for issuing digital native securities.
In the United Kingdom, Albert Weatherill, partner of the law firm of the financial services group Norton Rose Fulbright said in a blog to have participated in the latest FCA policy roundtables on the regulation of regime trading venues and other cryptoasset intermediaries.
Albert Weatherill, Norton Rose Fulbright
Weatherill wrote that addressing operational resilience, cybersecurity and governance remained high on the agenda, alongside conflict management, market access agreements and order management and execution.
He believes the sweet spot for regulation would not be to try to fit cryptocurrencies into the existing UK investment society or carve out a stand-alone regime for the new asset class.
“The sweet spot would be somewhere in the middle: leveraging a lot of what we already have where it works (which in most cases works) but ensuring that any regime adapts adequately to reflect those specificities of the cryptoasset landscape,” he wrote . “It’s not exactly 90% existing and 10% new, but it increasingly looks like the effectiveness and appropriateness of our regulatory framework will depend on what we do with that 10%.”
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