Markets
Credit Intermediation, Capital Efficiency Needed in Crypto
Cryptoasset trading is typically pre-funded, so credit intermediation, in the form of prime brokers, and capital efficiency are necessary 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 15th. Participants agreed that the collapse of crypto exchange FTX led to a necessary fight for quality, as it highlighted the importance of counterparty diversification, the requirement for institutional-grade technology, and the need for regulated custodians.
Chantal Bradford, Deribit
Chantal Bradford, head of EMEA institutional sales at centralized crypto options and futures exchange Deribit, told the panel that more traditional financial institutions (TradFi) are entering the crypto market. As they become more active, they ask more questions, such as how sites are managed and audited, how funds are segregated, whether they are regulated in a credible jurisdiction, and resilience.
Bradford continued that Deribit was connected to a network of third-party custodians before FTX’s collapse, but customers didn’t use them, and that has now changed.
Block trading volumes on Deribit have increased from 10% to between 35% and 40% since Bradford joined the company in February 2022, which she said highlighted the growth of institutional trading. She continued that tradFi institutions are allocating to native crypto firms rather than trading themselves.
Banks typically provide prime credit intermediation and brokerage services, but regulations currently do not allow them to trade crypto assets on a spot basis. A comparison was made with the forex 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 a huge expansion in trading volumes.
“Prime brokerage needs to improve as institutions don’t want to connect to 20 exchanges,” she added. “Prime brokers can take this currency risk and improve capital efficiency for institutional adoption.”
David Newns, chief executive of SDX, the blockchain-based exchange owned by Switzerland’s SIX Group, agreed on the panel that capital efficiency is key for institutions.
David Newns, SDX
“AsiaNext allows intraday, even hourly, margin payments and allows cross-margining between spot and futures trades,” he added.
Newns is also chairman 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 intends to launch trading in digital securities, real-world tokenized assets and sustainability-focused listings.
Bradford added that Deribit also allows for portfolio margins. In February this year, Deribit said in a statement that it has integrated with Fireblocks, a self-custody technology provider, to allow trading companies and asset managers to trade on the exchange from an on-chain wallet, which eliminates the risks of counterparty.
Regulation
Newns said regulatory divergence in a multipolar world will influence the evolution of the crypto 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 this year, two Swiss digital bonds were settled in 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 digitally native Swiss franc bond, which could be settled using the central bank’s wholesale digital currency, according to Ledger Insights.
In the Middle East, 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 regulator, which covers both spot and derivatives trading. The license will not be operational until the company fully satisfies all remaining conditions.
At the same time, Deribit said it was moving the company’s global headquarters to Dubai and appointed Luuk Strijers, previously chief commercial officer, 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 TradFi institutions are joining, which we hope will continue.”
Also in the Middle East, Abu Dhabi approved Coinbase Asset Management’s Project Diamond, the US-listed crypto firm’s platform for issuing digitally native securities.
In the UK, Albert Weatherill, partner at financial services group law firm Norton Rose Fulbright said in a blog that he participated in the latest FCA policy roundtables on the regulation of regime trading venues and other intermediaries in crypto assets.
Albert Weatherill, Norton Rose Fulbright
Weatherill wrote that addressing operational resilience, cybersecurity and governance remained high on the agenda, in addition to conflict management, market access agreements and order management and execution.
He believes the sweet spot for regulation would not be to try to fit crypto into the existing UK investment business or create an independent regime for the new asset class.
“The sweet spot would be somewhere in the middle – leveraging much of what we already have where it works (which it generally does), but ensuring that any regime adapts appropriately to reflect the specifics of the crypto asset landscape,” he wrote. “It’s not 90% existing and 10% new, but it increasingly appears that the effectiveness and adequacy of our regulatory framework will depend on what we do with that 10%.”
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