Cryptoasset trading is typically pre-funded so credit intermediation, in the form of prime brokers, and capital efficiency are needed in order for the asset class to be adopted by traditional financial institutions (TradFi).

A panel discussed the institutionalisation of exchanges and their evolution at the Tradetech DigiAssets conference in London on 15 May. Participants agreed that the collapse of crypto exchange FTX led to a necessary fight to quality as it highlighted the importance of diversifying counterparties, the requirement for institutional grade technology and the need for regulated custodians.

Chantal Bradford, head of EMEA institutional sales at centralized crypto options and futures exchange Deribit, said on the panel that more traditional finance (TradFi) institutions are entering the crypto market. As they become more active they are asking more questions, such as how venues are run 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 the collapse of FTX, but clients had not used them, and this has now changed.

Block trading volumes on Deribit have risen from 10% to between 35% and 40% since Bradford joined the firm in February 2022, which she said highlighted the growth of institutional trading. She continued that tradFi institutions are allocating to crypto native firms versus trading themselves.

Banks typically provide credit intermediation and prime brokerage services, but regulations do not currently allow them to trade spot crypto assets. A comparison was made with the foreign exchange market where the rise of prime brokers in the market led to hedge funds and market makers overtaking the banks as the main liquidity providers, and to a huge expansion of trading volumes.

“Prime brokerage needs to improve as institutions don’t want to connect to 20 exchanges,” she added. “Prime brokers can take on that exchange 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.

“AsiaNext allows intraday, even hourly, margin payments and allow cross-margining between cash and futures trading,” he added.

Newns is also chair of AsiaNext, the Singapore-based digital asset exchange that launched crypto derivatives trading at the start of this year. AsiaNext is a joint venture between Japan’s SBI Digital Asset Holdings and SIX Group. AsiaNext also aims to launch trading of digital securities, tokenized real-world assets and sustainability-focused listings.

Bradford added that Deribit also enables portfolio margining. In February this year Deribit said in a statement that it had integrated with Fireblocks, a technology provider for self-custody, to enable trading firms and asset managers to trade on the exchange from an on-chain wallet, which eliminates counterparty risks.

Regulation

Newns said regulatory divergence in a multi-polar world will influence 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 settled on SDX using a wholesale central bank digital currency (wCBDC) that is part of the Swiss National Bank’s of Project Helvetia III, and the World Bank has followed in their footsteps.

We are proud to announce that The @WorldBank has issued a #digitalbond on #SDX as its first international issuer. The bond will settle using Swiss Franc #wCBDC provided by the @SNB_BNS. The #bond is listed on both the #SIXdigitalexchange and the SIX Swiss Exchange. @commerzbank… pic.twitter.com/TZ0fQe442q

— SIX Digital Exchange (@SDX_global) May 16, 2024

In the Middle East, the Dubai entity of the Deribit Group 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) licence from the country’s regulator, which covers both spot and derivatives trading. The license is non-operational until the firm fully satisfies all remaining conditions.

At the same time Deribit said it was relocating the firm’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 onboarding, which we expect to continue.”

Also in the Middle East, Abu Dhabi has 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 in the financial services group law firm Norton Rose Fulbright said in a blog that he attended the FCA’s latest  policy roundtables on regulating regime trading venues and other intermediaries in cryptoassets.

Weatherill wrote that addressing operational resilience, cybersecurity and governance remained high on the agenda, in addition managing conflicts, market access arrangements and order management and execution.

He believes the sweet spot for regulation would not be to try and fit crypto into the existing UK investment firm or to carve out a standalone 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 the main it does) but ensuring that any regime appropriately adapts to reflect those specificities of the cryptoassets landscape,” he wrote. “It is not quite 90% existing 10% new, but increasingly it seems that the effectiveness and appropriateness of our regulatory framework will rest on what we do with that 10%.”