Slowly but surely, the Wild West era of digital asset trading is on its way to the last roundup. If regulation and courting of institutional investors continue, trading in cryptocurrency derivatives may soon be no more exotic than interest rate options or oil futures, according to industry experts.
At a panel discussion on the outlook for derivatives in digital assets at the FIA’s International Derivatives Expo in London on 18 June, four industry leaders were largely optimistic that the world of digital asset trading is on its way to maturity. With landmark regulations coming into force in the UK and Europe this year, panellists are focused now on bringing institutional investors into what they say is rapidly becoming an investible asset class.
Soon, the market won’t just be for punters and tech billionaires. As Arnab Sen, CEO and co-founder of the GFO-X digital assets trading platform put it, his firm is focused on serving real institutions, “not a recently set-up entity in a holiday destination with a couple of traders and a couple of million bucks put in it.”
One key part of successful financial innovation is a solid regulatory infrastructure, insisted Sen. “You cannot move fast and break things in a regulated financial market,” he said.
Watching spot grow
Duncan Trenholme, managing director and global co-head of digital assets at TP ICAP, said he thinks the regulations for crypto derivatives in the UK and Europe are largely sufficient, but the spot market still has some kinks in it. “I think there’s been a lot of regulatory uncertainty, evolving regulatory frameworks,” Trenholme said. “It’s been, frankly, an absolute nightmare to try and work out how you service clients, and each jurisdiction has a different interpretation,” he said.
These snags are expected to straighten out soon. In 2025, spot crypto asset markets will open in Europe, with the UK following in a more piecemeal way, according to Trenholme.
Clearing for digital asset derivatives is also on the way. “We're looking to launch within LCH a digital assets clearing service that's focused on the clearing of bitcoin futures and options in partnerships with GFO-X,” said Marcus Robinson, head of LCH CDSClear and head of the new LCH DigitalAssetClear, LSEG Post Trade.
Robinson said the goal of the post-trade infrastructure LCH and GFO-X are looking to create is a clearing system “very similar and familiar to how traditional derivatives markets operate today,” and he argues that it will have a similar impact on investor confidence as the mandate to bring clearing and central counterparty clearing brought to over-the-counter deals post-2008.
New channels, new products
At the same time, cryptocurrency trading is moving to regulated 24/7 markets. Steve Humenik, SVP, global head of capital markets, legal and head of clearing for Crypto.com, said Crypto.com’s spot markets have long been 24/7 and its CFTC-regulated products have also moved to 24/7 trading.
Another structural change that Sen sees ahead is that he expects the number of institutions serving as principal banks in the market will grow from one to two or three in six to nine months, which should also help the market’s growth. “I think if you start to get bank principal trading desks step into the market…and you have actual banks where they can trade amongst each other, with collateral held at G-SIBs, it starts to allow the derivatives market to grow,” Sen said.
Trenholme said institutional investors come to crypto from a variety of backgrounds. “You’ve got some equities desks that have picked it up, some FX desks, some commodity shops trade in it,” he said. Often, their preference in trading instruments will depend on the other products they trade. An equity trader, for example, might work with an exchange-traded fund.
Got volatility?
Beyond working on regulation and product design, Trenholme argued that the industry needs to do a better job defining cryptocurrencies “in a short, snappy way. Explain ether to traditional finance: What is it? Why should I be interested?”
But some clients don’t seem too concerned. Trenholme said institutional investors will come in and want to trade crypto, and he and his colleagues will ask, 'Are you interested in smart contracts and the blockchain side of things?’ ‘No, it’s got volatility, we want to trade it. Don’t really care that much about crypto'.
“That’s bizarre to see that happen, but the reality is, I get it, right? It’s another asset that you can trade, and it has volatility and you can apply your strategies to it,” Trenholme said.
