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 15. 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 of regulated depositories.
Chantal Bradford, Deribit
Chantal Bradford, head of institutional sales EMEA at Deribit, a centralized crypto options and futures exchange, said during the panel that more traditional financial institutions (TradFi) were 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 resiliency.
Bradford added that Deribit was connected to a network of third-party custodians before FTX’s collapse, but clients weren’t using 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 says highlights the growth in institutional trading. She added that tradFi institutions allocate allocations to crypto-native businesses rather than trading themselves.
Banks typically provide prime credit intermediation and brokerage services, but regulations currently do not allow them to trade crypto assets for spot. A comparison has been made with the foreign exchange market, where the rise of prime brokers in the market has led to hedge funds and market makers supplanting banks as the main liquidity providers, as well as a huge expansion of transaction volumes.
“Prime brokerage needs to improve because institutions don’t want to connect to 20 exchanges,” she added. “Prime brokers can take on this currency risk and improve capital efficiency for institutional adoption.”
David Newns, chief executive of SDX, the blockchain-based exchange owned by the Swiss SIX Group, agreed during the panel that capital efficiency is essential for institutions.
David Newns,SDX
“AsiaNext allows intraday and even hourly margin payments, as well as 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 Japanese company SBI Digital Asset Holdings and SIX Group. AsiaNext also aims to launch trading in digital securities, real-world tokenized assets and sustainability-focused listings.
Bradford added that Deribit also allows for wallet margining. In February this year, Deribit said in a statement that it had integrated Fireblocks, a self-custody technology provider, to enable trading firms and asset managers to trade on exchanges from an on-chain wallet , thus eliminating counterparty risks.
Regulation
Newns said regulatory divergences in a multipolar world will influence how the crypto market evolves.
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 on SDX using a wholesale central bank digital currency (wCBDC) which 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 Swiss franc digital bond, which could be settled using a central bank 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. of the country’s regulator, which covers both spot trading and derivatives trading. The license is not operational until the business fully meets all remaining conditions.
At the same time, Deribit announced the relocation of the company’s global headquarters to Dubai and appointed Luuk Strijers, previously commercial director, as general manager.
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 onboarded, and we plan to continue. »
Also in the Middle East, Abu Dhabi approved Coinbase Asset Management’s Project Diamond, the US-listed crypto company’s platform for issuing digital native securities.
In the United Kingdom, Albert Weatherill, partner at the law firm of the financial services group Norton Rose Fulbright said in a blog that he attended the FCA’s latest policy roundtables on the regulation of trading platforms and other intermediaries in the crypto-asset space.
Albert Weatherill, Norton Rose Fulbright
Weatherill wrote that 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 integrate crypto into the existing UK investment trust or create a standalone 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 mostly does) but ensuring that any regime adapts from appropriate manner to reflect the specifics of the crypto-asset landscape,” he wrote. “It’s not really 90% existing and 10% new, but it increasingly seems that the effectiveness and relevance of our regulatory framework will depend on what we do with that 10%. “
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