Crypto platforms vie for big traders in a crowded space

That makes differentiation key, and exchanges are upping their branding game to offer operating efficiencies and deep pools of liquidity to lure traders.

Crypto trading in recent years has boomed. The coronavirus pandemic saw interest rates cut, and retail investors were flush with cash they could not spend because of lockdowns. In search of higher returns, investors looked to the crypto ‘wild west’ for the prospect of large returns.

While governments are in various stages of developing digital asset regulation, hundreds of companies have already moved in, looking at the new asset class as an area of opportunity.

Bullish is one such crypto exchange vying for institutional traders. Following a $9bn merger with a New York Stock Exchange Spac, former NYSE Group president Thomas Farley is set to become the firm’s chief executive.

“The market differentiation is not particularly strong because you can trade bitcoin everywhere. The differentiation comes from cost-effective and efficient execution,” said Bullish senior vice-president Michael Lau.

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Which assets or which tokens you trade can sometimes be less relevant, Lau said: “It’s what your experience is going to be on those exchanges.”

While retail investors may be more open to newer cryptoassets, institutional investors are keen to stick with proven tokens. Jenna Wright, managing director for LMAX Group, another crypto exchange for institutional investors, said that 85% of spot volumes on its platform were either bitcoin or ether.

Lau told Financial News that Bullish’s large liquidity pool will be a key part of its value for such big traders.

“If you want to execute a trade at a significant size, there are few places you can be able to trade and not risk significant slippage in the price,” he said.

For exchanges that include retail clients in their business model, there can be less pressure to be the best bitcoin or ether trading platform.

Bitstamp CEO Julian Sawyer said that about a quarter of the exchange’s customers under 25 have never traded bitcoin.

“Our [retail] customers are wanting much more depth and [a] different conversation,” he told FN.

Sawyer said that robust regulatory and compliance standards are what also helps his exchange stand out in a crowded field; Bitstamp, which counts both retail and institutional traders as clients, is one of six crypto exchanges rated AA by Cryptocompare, a crypto data provider.

Go with what you know

Due to regulatory and compliance hurdles, many institutional investors still can’t touch physical crypto. Some have instead used derivatives contracts as an alternative to direct investment.

As one of the world’s largest derivative and commodity exchanges, the CME is often the first step for institutional traders to dip their toes into digital assets.

Tim McCourt, head of equity and FX products at CME, told FN that “volumes are often on a par, if not larger, than a lot of the crypto spot platforms that are out there. It is certainly an important part of the price discovery process.”

Alpay Soytürk, chief regulatory officer at Spectrum Markets, a derivatives multilateral trading facility, said this isn’t surprising.

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“The fact that the crypto futures market is much more liquid than the spot market could be interpreted as a result of existing regulation for trading of derivatives on cryptoassets.”

In the case of the CME, its crypto futures are regulated by the Commodity Futures Trading Commission.

Like with the spot exchanges, most interest is in bitcoin and ether. McCourt said the CME is currently sticking with tokens that have financial use cases.

“The ones that we’re really interested in are the one’s our clients are interested in. It is those tokens that provide some sort of fundamental utility which are primarily ether or bitcoin.”

The road to more regulation

However, regulatory hurdles are present even in the derivatives space. For example, the UK’s Financial Conduct Authority has banned retail consumers from trading crypto derivatives.

“We are likely to stick more to those ones that provide a fundamental utility such as fulfilling risk management needs,” said McCourt.

“[Cryptoasset futures] removes a lot of those frictions associated with entering the underlying digital asset spot market with respect to wallets, custodians, insurance, getting regulatory approval and know-your-customer.”

Governments in advanced economies are increasingly pushing to regulate digital currencies further. Since 1 April, cryptoasset businesses that begin trading in the UK have had to register with the FCA. Concerns that large firms such as Revolut and Blockchain.com would be forced to suspend digital asset operations caused the FCA to make a last-minute decision to place 12 firms on a temporary registration list.

The European Commission’s proposed Markets in Crypto-Assets regulation is also currently being negotiated. It would regulate both cryptoassets and stablecoins — cryptoassets that are pegged to fiat currency. MiCA would help bring uniformity to European crypto regulation, said Soytürk, which currently remains fragmented.

Likewise, the US is looking to regulate cryptos. Last month, President Joe Biden signed an executive order to study the benefits and risks of digital assets.

More recently, Securities and Exchange Commission chair Gary Gensler said in a speech: “These crypto platforms play roles similar to those of traditional regulated exchange. Thus, investors should be protected in the same way.”

To contact the author of this story with feedback or news, email Jeremy Chan