Evolving regulation expected to push crypto derivatives trading volumes onshore

New Acuiti report found that most respondents expect between 26-50% of listed crypto derivatives trading volumes to be conducted onshore following establishment of new regulatory frameworks.

With market structure for crypto derivatives trading expected to evolve significantly over the next few years, an Acuiti report in association with D2X Group has found that where crypto derivatives are traded is likely to change too.

Respondents to the survey anticipate a split in liquidity between onshore and offshore, with a bias towards the incumbents having existing liquidity and retail flows as an advantage.

Most respondents (39%) stated that once regulatory frameworks are fully established in onshore regulated markets, 26-50% of listed crypto derivatives trading volumes would be conducted onshore.

The second highest percentage of respondents, 32%, anticipate that 51-75% of trading volumes would be conducted onshore. Only 4% of respondents stated that all volumes will be onshore.

However, with the prospect of digital assets trading onshore venues mimicking traditional financial markets thanks to upcoming regulatory and market structure changes – the lack of weekend trading and clearing offered by traditional venues was noted by respondents as a challenge.  

When asked how much of a challenge the lack of weekend trading on regulated onshore entities would post, almost 40% of crypto native firms and 30% of traditional finance firms said it posed a significant challenge.

The report also noted that given the 24/7 nature of the crypto market, the lack of weekend clearing offered by traditional financial markets could expose investors to risk of price moves and increased margin requirements.

“Clearing in traditional finance is by its very nature a daily process and no clearing activities take place over the weekend. That means that most regulated onshore digital assets trading venues will also limit trading hours,” said Acuiti in its report. “Crypto is, however, a 24/7 market and, while clearing goes some way to mitigating counterparty risk, there is an inherent build-up of market risk over the weekend.”

Acuiti’s report found that over 65% of traditional firms either agree or strongly disagree that they would prefer to trade on venues with lower initial margin requirements.

Similarly, over 65% of traditional firms either agreed or strongly agreed that a model in which firms can access a venue directly as well as through a broker will be of benefit to the overall crypto derivatives market.

Cross margining between different crypto assets was also found to be important in firms’ decision on where to trade, with 47% stating that it would be crucial, while 42% felt it would be a significant factor.

Of those surveyed, 86% stated that more institutional participation on regulated trading venues will be the largest positive impact for the entire crypto ecosystem, while 14% believe the move will encourage greater opportunities for native crypto firms and early traditional finance adopters.

Among the respondents, 0% felt that the move would have no positive impacts, would lead to less trading on offshore markets and significantly more retail participation.

While several major jurisdictions have introduced some form of licencing for exchanges to allow them to offer services to clients in that region, Acuiti noted that comprehensive regulatory frameworks that reflect the nuances and full scope of trading in digital assets are only now being developed in the major jurisdictions.

The EU has developed the Markets in Crypto Assets (MiCA) regulation will take effect from next year, while the UK government has revealed plans to develop a separate framework based on existing regulations where possible. Elsewhere Singapore, Hong Kong and Dubai have also launched or are developing comprehensive frameworks.

“Innovations in native crypto derivatives market structure have valid applications in onshore regulated markets,” said Will Mitting, founder of Acuiti.

“Ultimately the native market structure of crypto derivatives will come together with the traditional market structure to create the market of tomorrow. Many of the innovations in the crypto native world, such as real time margining and risk management, will inevitably become part of global markets across both traditional and digital assets.”

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