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Institutional adoption of crypto derivatives expected to grow 

Panelists at IDX discuss appetite for crypto, but note inconsistent regulation inhibiting full-scale adoption

29 September 2021

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Institutional investors are increasingly showing an appetite for crypto markets, said experts at the FIA International Derivatives Expo conference in London on Tuesday. However, they noted a key barrier to full-scale adoption is a lack of clear regulation.

Speaking on the Future of Crypto in Europe panel, Duncan Trenholme, co-head of digital assets at interdealer broker TP Icap, said he has seen a marked increase in interest from institutions. 

"Looking back over the last couple of years, crypto has definitely been a topic on people's radar across finance, but it's really been over the last nine months where our wholesale customer base has started to get into this asset class," he said. 

TP Icap announced plans in June to set up a wholesale cryptocurrency trading platform for spot crypto-asset trading, including bitcoin and ethereum, as well as offering post-trade infrastructure with a network of digital asset custodians.

The platform, which is subject to registration with the UK Financial Conduct Authority, is supported by Dutch high-frequency trader Flow Traders and two digital asset custodians Fidelity Digital Assets, an arm of the financial services giant of the same name, and Zodia Custody, a new effort launched by Northern Trust and Standard Chartered's SC Ventures. TP Icap already offers trading in CME Group's bitcoin futures. 

"It's not a surprise that institutions want to deal with crypto through ... traditional financial products," Trenholme added. "Internal control functions, compliance departments and risk departments understand these products because the firm deals with them every day in other asset classes." 

David Olsson, a former Credit Suisse director who joined cryptocurrency lender BlockFi last year as global head of institutional distribution, said he expects more major hedge funds to start trading crypto assets in the next six months. 

"It is my day job is to speak to the institutions of the world about crypto and crypto adoption. Out of the top 40 hedge funds globally that have $10 billion plus in AUM, we've talked to 80% of them, although the number that has entered the market is much smaller," Olsson said.

He explained there is a time lag between firms hiring the right people, building technology and deploying crypto strategies. 

"Over the next six months I think we will see a significant entrance of some of the top 10 hedge funds, which have a bit more risk appetite," he said. "Asset managers have a long way to go to figure out how to enter the space." 

Rising interest in digital assets

Some big-name institutions and trading companies are taking steps to enter the crypto marketplace through efforts that will likely boost the asset's appeal among other investors as well. Last month, Citi said it was considering offering bitcoin futures trading for some institutional clients, citing increased demand in the crypto space. 

Earlier this year, Goldman Sachs restarted a trading desk to help clients deal in bitcoin futures, while Jump Trading Group launched Jump Crypto, a dedicated team focused on the growth and development of blockchain ecosystems and cryptocurrencies. 

Still, a large swathe of Wall Street has steered clear of crypto assets. One concern is their volatility. Another is that regulators are wary of crypto, as shown by China's outright ban on all cryptocurrency transactions and US Securities and Exchange Commission Chairman Gary Gensler's numerous warnings about the state of the market, which he has labeled the "Wild West".  

Simon Barnby, chief marketing officer at Archax, the first digital securities exchange regulated by the UK FCA, said on the panel that regulatory uncertainty around digital assets is a challenge for institutions. 

"If you look at the history of crypto, it started out with technologists issuing coins and opening up exchanges in an unregulated way, so the starting point was not very institutional. It's a new marketplace that has evolved out of a retail starting point," he said. "It's at an early stage, but things are moving in the right direction" to facilitate broader institutional adoption.

Exchange perspectives on crypto

On a separate panel at IDX, exchange leaders touched on how they are approaching crypto. Eurex, the largest derivatives exchange in Europe, recently launched bitcoin ETN futures as the first step in its portfolio of crypto derivatives. Speaking on the panel, Zubin Ramdarshan, Eurex's head of equity and index product design said institutional adoption is here to stay. 

"We think this asset class will be here for the future and of course we have to prepare for that. The challenge is that most bitcoin trading is on unregulated venues and that's a concern," Ramdarshan said "Moving that activity to a highly regulated, centrally cleared environment is a healthy progression and Eurex wants to be part of that conversation." 
 
Stephane Boujnah, chief executive of Euronext, said he was approaching crypto with caution due to a lack of regulatory clarity.

"There is an effort by the regulators in the European Union to try and create a predictable framework, but the final outcome is not absolutely certain yet," said Boujnah.

"For us as recognised exchanges, we provide certainty to customers. What we are trying to do is offer to our clients indirect exposure to these assets – to ETNs, potentially to indices – but the solution is indirect so that the balance between the upside of offering solutions for clients who want to be exposed to this asset class and the downside, if everything goes wrong, is manageable," he added. 
 
An exchange that has staked out its territory in the crypto world is CME Group, which launched futures on bitcoin four years ago and launched ether futures earlier this year. 

"The market needs a well-regulated, well-functioning market, whereby customers are protected," said Derek Sammann, senior managing director, global head of commodities and options products at CME Group. "That's been our starting point and we think it's a market that will grow." 

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