Acuiti Crypto Derivatives Expert Network Expects Crypto Exchange Consolidation

The recent cryptocurrency derivatives market turbulence is set to bring in structural changes, according to the Acuiti’s Q3 Crypto Derivatives Management Insight Report.

The changes are expected both through the exit of some market participants and through changing attitudes to practices like risk management and leverage. 

The report, which is based on the views of the Acuiti Crypto Derivatives Expert Network, a group of senior executives from across the globe from hedge funds, banks, brokers, prop traders, asset managers and exchanges, said that in the medium term, regulation will level the playing field for traditional and native firms. 

“One route for this to happen is consolidation, a trend that was already observable in the market’s most recent bull phase,” the Network said.

The Network strongly expects that crypto exchanges will now consolidate further. 

The Network also expects that competition for market share will increase. 

A majority of the network (79%) believe that a new entrant exchange in crypto options could build significant market share against current incumbent Deribit, for example. 

The Network also believes that banks will come to play a strong role in DeFi, with 58% believing they would play a significant role in permissioned DeFi (only 3% thought this would happen in pure DeFI though). 

However, a sizeable proportion (35%) still thought that banks would have no engagement with DeFi in the future.

Recent market events have also raised inevitable questions about how crypto markets currently operate. 

The areas where the network had most critical concerns were the financial stability of lenders and native prime brokers and risk management practices.

The Expert Network also expects that a tougher regulatory approach from authorities will be a lasting result of recent falls in crypto prices. 

“This is already playing out to some extent. In its pursual of an insider trading case against a former Coinbase manager, the SEC has signalled that it considers at least nine Cryptoassets to be securities,” the report said.

Ultimately, the Network expects greater regulation to favour TradFi. A minority of the network saw regulation accruing the same benefits to native and DeFI markets. 

Most saw volumes falling to some degree on these platforms. 

While regulation is largely seen as necessary for growing the institutional crypto derivatives market, the Network still harbours trepidation about how optimal finalised frameworks will be for market growth. 

The EU is seen as the most likely major jurisdiction to be the first to develop a framework that will enable significant institutional participation.

The US, Singapore, and the UK were seen as likely to follow close behind it. 

However, only 10% of respondents thought that the EU would create the best regulatory environment for institutional adoption of digital assets. 

In this respect, the US was seen as the most promising regulatory regime backed by 35% of respondents.  

Duncan Trenholme

Duncan Trenholme, Co-Head of Digital Assets, TP ICAP, cited in the report, said that the regulatory noise around crypto is mostly focused on the spot asset, where there is still considerable uncertainty.  

He noted that it’s important to separate the regulation of the spot asset from the derivatives products. 

“The first we’re still waiting on clarity for, the second largely fits within existing frameworks,” he said. 

“It’s been great to see regulators working with industry and being proactive. As these frameworks start to fall into place for the spot assets, that will really bring in a wave of traditional financial firms. The regulatory ambiguity is definitely an impediment for them to enter this asset class currently,” he added.