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Regulations and derivatives are facilitating the entry of traditional finance institutions into cryptocurrency, according to panelists.
According to panelists, avoiding participation in decentralized finance is increasingly becoming a professional risk for individuals in traditional finance.
Panelists addressed regulation and the significance of derivatives in integrating traditional finance with decentralized finance (Daniel Murray/Consensus modified by CoinDesk)
Key points:
- Leading financial entities are venturing into crypto derivatives as more definitive U.S. regulations facilitate the inclusion of digital assets in mainstream investment portfolios.
- Innovative offerings such as overnight rate futures, multitoken indexes, and access to DeFi liquidity are allowing institutional investors to expand their focus from bitcoin to a wider range of crypto assets and arbitrage tactics.
- Futures and other derivatives, supported by a strong industry-wide beta benchmark, are poised to direct trillions of dollars in institutional investment into the crypto space, making non-involvement an increasing professional risk for traditional finance experts, according to panelists.
Enhanced regulations and advancements in technology are propelling the merging of traditional finance (TradFi) with decentralized markets, prompting established firms to explore sectors like crypto derivatives, as discussed by panelists at Consensus Hong Kong.
"Regulation plays a crucial role. It provides the framework necessary for operations," stated Jason Urban, global co-head of digital assets at Galaxy Digital (GLXY), who participated in the "Ultimate Deriving Machine" panel.
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Other panelists, including leaders from exchange operator ICE Futures U.S., crypto prime brokerage FalconX, and investment firm ARK Invest emphasized how recent developments in the U.S., such as the anticipated approval of spot crypto exchange-traded funds (ETFs) in 2024 and alignment between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), have transitioned crypto from a speculative niche to a foundational element of investment portfolios.
The main conclusion is that derivatives are set to facilitate the influx of trillions of dollars into the institutional market. This shift extends beyond bitcoin , the leading cryptocurrency by market capitalization.
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ICE Futures U.S. President Jennifer Ilkiw pointed to the upcoming launch of overnight rate futures linked to Circle Internet’s (CRCL) USDC stablecoin in April, along with multitoken indexes, as indicators of institutions seeking diverse exposure beyond bitcoin.
"It simplifies the process. It’s similar to investing in our MSCI Emerging Markets, which includes hundreds of equities. You don’t need to know every single one," she remarked, referencing interest from former skeptics of cryptocurrency.
Josh Lim, global co-head of markets at FalconX, emphasized the importance of connecting traditional financial exchanges like the CME with liquidity pools in decentralized finance (DeFi) through prime brokerage services for hedge fund arbitrage and leverage opportunities.
"Hyperliquid has undoubtedly been a significant trend this year, allowing many of our hedge fund clients to access that market via our prime brokerage solutions," Lim mentioned, alluding to the largest decentralized exchange (DEX) for derivatives.
"It is crucial for firms like ours to bridge the liquidity divide between TradFi and DeFi. This provides a notable advantage," Lim stated. Innovations in crypto, such as continuous trading and perpetual contracts, are impacting Wall Street.
ARK Invest President Tom Staudt referred to the introduction of spot bitcoin ETFs in the U.S. as a pivotal moment that integrated crypto into the portfolios and systems of mainstream wealth managers.
However, he advocated for the establishment of an industry-wide beta benchmark—a comprehensive market standard for evaluating an asset’s risk and performance against the overall crypto market. He asserted that a diversified index is essential rather than depending solely on a single reference point like bitcoin.
"Bitcoin represents a specific asset, but it doesn’t encompass an entire asset class. You cannot achieve alpha without beta," he remarked, indicating that futures could serve as a pathway for structured products and active investment strategies.
Failing to engage at this juncture is akin to "career suicide," as real-world assets transition on-chain and necessitate involvement, Urban concluded.
