Traditional finance holds key to further crypto market growth
The Trump administration's embrace of digital assets has promised to usher in a new golden era for the crypto industry. But the growth of crypto markets will remain capped as long as traditional financial institutions remain on the sidelines, senior executives told FIA’s International Derivatives Expo in London on Wednesday.
“We need to bring the real institutional players on[board] and then, suddenly, institutional [crypto] demand will dwarf retail demand,” said Arnab Sen, CEO and co-founder of crypto trading platform GFO-X.
“Crypto was supposed to build trust [yet] the one thing it doesn't have in the market is trust, which is why everything is pre-funded – and you can't build a derivatives market on a pre-funded market,” Sen said.
Crypto volumes are largely driven by retail clients, who account for roughly 80% of transactions, according to Sen. That contrasts with more traditional financial markets such as derivatives where financial institutions make up the bulk of flows.
Many institutional investors remain wary of trading digital assets despite the Trump administration taking a more pro-crypto stance. That means most steer clear of so-called crypto-native exchanges that operate in more lightly regulated jurisdictions. Sam Bankman-Fried's FTX has come to embody the risks of trading on these venues after what was then one of the largest crypto exchanges in the world imploded in 2022 amid revelations of massive fraud.
However, there has been a movement among some mainstream financial firms to grab a larger share of the activity in these markets. CME, one of the world's largest derivatives exchanges, has been capturing market share from more crypto-native firms. An important part of its pitch to investors is CME's highly regulated infrastructure and its long-running track record of trading futures in more established asset classes like fixed income and equities.
Other exchanges like Eurex are steadily gaining ground too, while LCH, owned by IFR's parent LSEG, has plans to ramp up its involvement in the market.
“You need the mixture of both [traditional finance] and [de-regulated finance] to make the [crypto] ecosystem grow,” said David Furlong, CEO at Virtu Financial. “Trying to have an ideal world where [crypto is] all decentralised doesn't tap into the huge opportunity that is there on the [traditional finance] side.”