Apart from regulation, traditional buy- and sell-side participation remains critical to the development of the crypto derivative market, according to the inaugural Crypto Derivatives Managers’ Insight Report published from Acuiti in partnership with Deribit, an Amsterdam based, cryptocurrency exchange for bitcoin futures and options trading.
The report showed that derivatives comprised 63% of crypto trading in February 2022 while crypto exchange Binance saw an average daily volume of $600 billion in bitcoin futures.
Binance, which was founded our years ago, is the largest futures exchange today while the overall futures market has grown to a peak of $4.96 trillion in 2021.
However, CME bitcoin futures and options –products better recognised in the institutional investor community –accounted for $36bn and $362.8m of volume respectively.
Buy and sell-side firms have been wary to enter the market outside offering clients clearing for derivatives on CME.
There have been a few exceptions with for example, Goldman Sachs and TP ICAP providing liquidity in ETC Group Physical Bitcoin and CME bitcoin futures.
Last month, Goldman Sachs also conducted the first OTC non-deliverable option trade by a US bank with Galaxy Digital Holdings.
The report noted that the gap is being filled by a plethora of new, native crypto sell-side providers who have been more than happy to offer access and services to crypto derivatives markets.
As in the exchange world, this disrupts the stalwart financial infrastructure players who could become disintermediated.
One of the more notable developments highlighted in the report is FTX’ application to the Commodity Futures and Trading Commission (CFTC) to operate a regulated 24/7 derivatives markets offering a range of traditional products.
The CFTC has launched a consultation on the proposals and, while it is not expected to approve the market to trade in traditional futures and options any time soon, it is likely to approve it for crypto derivatives as a test case.
“This represents one of the most significant potential innovations in derivatives market structure since the advent of electronic trading,” the report said.
In terms of legislation, members of Acuiti’s Crypto Derivatives Expert Network, put platform regulation as the top priority area followed by stable coin and custody.
Trading rules and surveillance, including reporting violations to authorities, were also seen as key areas for greater oversight.
There have been some movement with President Biden’s Executive Order on Ensuring Responsible Development of Digital Assets and the European Union’s recent push on crypto designed to support the development of instruments.
In some ways though tighter rules are a double-edged sword.
As the report notes, the Network believes crypto will become a less volatile asset class as the market matures and current proponents continue to educate and bring more institutional liquidity and pricing methodologies into the markets.
However, “given many market participants are attracted to the volatility in crypto, a reduction in volatility will also pose challenges to digital assets,” it said.
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