Oct 27, 2022 - Economy

ISDA's first crypto conference homes in on risk and whales

Illustration of a whale’s tail emerging from a sea of pixelated coins.

Illustration: Shoshana Gordon/Axios

One can bring the whales to crypto waters, but getting 'em to dive in after the past year's events will require more finesse.

Why it matters: Trillions in market capitalization in crypto has been wiped out during the market rout. And while a bounce doesn't necessarily require institutional involvement, Big Money could help blunt the volatility characteristic of crypto markets.

State of play: The International Swaps and Derivatives Association's (ISDA) first ever crypto-focused conference in New York on Wednesday was, itself, proof that demand is there.

  • The ISDA represents all market participants in the global derivatives market, like banks, insurance companies, and financial firms. It has over 1,000 member institutions from 79 countries.
  • "General appetite for crypto is growing. Volumes might be suppressed," Nicola White, chief of liquidity provider B2c2, said during a panel called "Understanding the Institutional Trade.
  • But much of the talk there centered around risk and what is needed to draw more institutions — those who buy wholesale, less retail — for crypto's next market cycle.

Between the lines: Investors (and regulators), for now, appear comfortable with products that are already familiar to them, like futures and options or financial instruments that deliver indirect exposure to bitcoin and ether.

  • "TradFi [traditional finance] as a whole is using derivatives to get into the space, because there's a lack of regulatory clarity," White said.
  • "But folks are getting their products ready."
  • Meanwhile, questions White gets from crypto natives are: "How do options work" and "what is an ISDA" and "why is that important?"

Reality check: Those instruments would've come in handy during the bout of market volatility earlier in the year.

  • "If the past six months told us anything, [it's that] it necessitated derivatives," said Crypto.com CEO Travis McGhee.
  • "Speculation is not necessarily bad, but we need the ability to hedge that risk."

The missing pieces are what's holding back the pace of adoption.

  • "Building has been on the buy-side. From a sell-side infrastructure perspective, there isn't a full suite of tools to manage day-to-day risk," said Keith Coyne, head of strategy and product at Cowen Digital.
  • White added that there is probably broad agreement that there's infrastructure used by TradFi that is currently missing in crypto, but that there are benefits too. "Things like settlement...If you settle that quickly, that reduces counterparty risk."

Of note: For some, that wasn't enough.

  • "Post-Three Arrows, counterparties wanted to go to a centralized entity where there was greater oversight," Shiliang Tang, CIO of LedgerPrime, said, describing how clients with an eye on that risk were requesting a change of venue.
  • "Derivatives trading typically happens on unregulated or bilateral OTC and are undercollateralized or undermargined," Tang said.

Crypto natives aren't necessarily dumb to derivatives, but they've been shut out by futures commission merchants (FCM's).

  • "FCM is the gateway to those products, so that's a bit of a challenge for growth," Coyne said. "Crypto native funds smaller in size struggle to get access."

What others are saying: Institutions need the all-clear signal from regulators.

  • "Lack of clarity is keeping the next wave of institutional capital from coming in size," said Brett Tejpaul, head of Coinbase Institutional.
  • Yes, but: "More traditional players that have taken a pass on the last couple cycles, they're anticipating with all of the activity in D.C., clarity will eventually come," said Cboe Digital chief operating officer Matthew Trudeau. "They're not waiting."

The bottom line: "What's different now relative to last time — crypto adoption came over speculation of short-term prices," Tejpaul said. "Crypto as an asset class is starting to have use-cases beyond that. Gives everyone in the room the feeling of being a stakeholder."

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