The impacts of FTX’s collapse and what crypto markets and traditional players can learn from each other dominated a panel discussion on "Markets of the Future" at FIA Expo on 15 November.
Speaking about the downfall of cryptocurrency exchange FTX, which filed for bankruptcy on 11 November, Travis McGhee, the head of the US derivatives business of Crypto.com, told the audience that “a cardinal sin had been committed in our industry—the touching of client funds.” Crypto.com, a large trading venue for cryptocurrencies, entered the US derivatives markets last year with the purchase of two small retail-oriented futures exchanges.
“The short-term impact is that it’s going to set the crypto industry back a few years. It makes our job harder because what we find ourselves in now is a confidence crisis,” McGhee said. “But this isn't a crypto problem, this is a human problem. What happened last week was not because of crypto, it was a human failure. We must build that confidence, but it takes time to build trust. It can be torn down in seconds and can sometimes take years to build back.”
Jamil Nazarali, chief executive officer of the recently launched EDX Markets, agreed that the immediate fallout from FTX, which has left an estimated one million customers facing total losses in the billions of dollars, was an erosion in investor confidence.
EDX Markets, which was launched in September by a consortium of broker-dealers, market makers and investment firms, allows investors to buy and sell digital assets through established brokers, rather than directly from a crypto-native exchange.
“We have a slightly different business model in that we are catering to intermediaries that want to execute their firm's flow,” said Nazarali. “What we are hearing is that there are a lot of customers who, because of this crisis of confidence, want to trade with firms they already have accounts with.”
He added that there is a need in the crypto market for an exchange “that is focused on intermediaries, doesn't have direct retail accounts, doesn't custody its assets, and does what exchanges do in most other asset classes around the world.”
Simon Johansen, chief operating officer of Jump Crypto, a division of the Jump Trading Group, said that there is still demand for exposure to the crypto space despite the FTX fallout.
“The genie is not going to go back in the bottle,” he said. “The unfortunate situation is that a lot of that volume is being driven offshore. I hope that any regulatory response acknowledges that this is a human problem. We want to make sure that we can enforce the separation of church and state between custodians, prop trading firms, exchange operators and settlement layers.”
Julie Winkler, chief commercial officer at CME Group, which offers cryptocurrency futures in a regulated exchange, talked about the importance of regulation in the crypto space.
“We've been through a lot of these crises in various shapes and fashions before, and the one thing this industry has done a very good job at is being resilient and acting quickly,” Winkler said. “You look at the investor protections we have in place, and all the customer segregation rules, and people see this as a place where they can get exposure to this asset class in a safe and regulated environment. This is proof again that regulation, while it doesn't solve everything, is a really important part of the solution.”
Alicia Crighton, co-head of global futures at Goldman Sachs, stressed the importance of being able to define and address the lessons learned from the FTX collapse. She also talked about the important role that futures commission merchants play as intermediaries in futures markets.
FCMs collect margin and make sure customers have enough to support their positions. They also contribute the majority of the capital in the guarantee funds that clearinghouses use to cover losses from a default.
“This really highlights the importance of the FCM model when it comes to governance structure, asset segregation and customer protection. These are the parts of the industry not many people think about, but when an issue like this happens, it really shines a light on the important role intermediaries play,” Crighton said.
The panelists also discussed what crypto and traditional market players can learn from each other, with CME’s Winkler pointing to the security of traditional players and the nimbleness of crypto firms.
“The regulated marketplace has worked, and we create that safe environment. We create things like circuit breakers and price limits and segregated funds, things that people don't necessarily think that they need but will be important going forward,” Winkler said.
“When I see crypto exchanges doing well, it probably boils down to two things. One is the ability to act quickly with the ease of onboarding and seamlessness and the second is about what clients want and need,” she said.
“Some of us remember the days when it could take months to open a futures account, maybe weeks to fund it. That's not the environment that we're in today, thanks to many of the FCMs that have invested in technology along the way to ease that. This is the experience that customers come to expect, and the crypto exchanges have proven that out very well,” she said. “There’s a vast difference between [traditional products] and a coin that can be set up overnight, but I'm sure in the future we will see a speeding up of the product development cycle and will be meeting somewhere in the middle.”
