Custody and Settlement to Separate from Centralized Crypto Exchanges


The current turmoil in the crypto market will leave more specialized companies with stronger governance and risk management, and institutions will increasingly look to work with companies they trust with a prudent governance record, according to Coalition Greenwich.

The consultant said in its report,Main market structure trends to watch out for in 2023, that crypto is in the midst of its dot-com moment and laundering will leave fewer vertically integrated companies. and more specialized companies with stronger governance and risk management on a flight to quality.

“These will be overseen by tighter regulations that will move the entire market segment forward,” Coalition Greenwich said.

In addition, institutions will increasingly look to brands and institutions with a real track record of prudent governance and putting customers first.

“And with these changes, we are likely to see increased institutional allocations to cryptocurrencies and perhaps even…a spot Bitcoin ETF,” the report added.

Colleen Sullivan and Peter Johnson, Co-Business Directors at Brevan Howard Digital said in a blog who, in their personal opinions, have never been more excited about cryptocurrencies.

“We’ve seen multiple cryptocurrency market cycles and know that’s when the hype dies down as builders build, non-speculative use cases pick up speed and big investments are made,” added Brevan Howard Digital. “It’s also when the industry refocuses on how fundamental web3 innovations of digital ownership and open network value transfer can positively impact the world.”

Custody

Brevan Howard Digital predicted that custody and settlement will begin to separate from centralized exchanges. Cryptocurrency exchanges may have a vertically integrated structure that operates as a brokerage, custodian, and clearing/settlement provider. However, the alleged fraud and failure of the FTX exchange will ultimately change this paradigm.

Coalition Greenwich said in a report last year that fully regulated custody of digital assets is important or extremely important to most on both the sell and buy sides. the survey, Providing Digital Asset Services: An Institutional Infrastructure Roadmapfound that 71% on the sell side and 62% on the buy side believe that fully regulated custody is important/extremely important.

Commerce

Brevan Howard Digital also said that the bankruptcy of FTX and the collapse of other custodial/centralized platforms will drive overdue changes in the structure of the cryptocurrency trading market. They expect trading volumes to shift to decentralized crypto exchanges (DEXs) from centralized exchanges (CEXs), which have their own order books and infrastructure. Rather, a DEX acts like a decentralized application on a blockchain.

CryptoCompare, an FCA-authorized reference manager and digital asset data provider, said in its 2022 review that it was one of the most impactful years for centralized crypto exchanges since the Mt. Gox crash in 2014.

“Following the fall of FTX, the main takeaway from 2022 is the increased importance of security and transparency in the CEX sector in 2023,” CryptoCompare added. “Our hypothesis is that exchanges with superior transparency policies, for example the release of clear and audited Proofs of Reserves (PoRs), will be the ones to succeed, particularly in a year where we believe it will have sustained lower volumes.” .

Trading volumes on CEX remained well above their decentralized counterparts according to CryptoCompare, despite having decreased by 46.2% in 2022.

CEX vs DEX crypto volume

Source: CryptoCompare

CryptoCompare predicted that continued contagion from the FTX crash will lead to sustained low trading volumes relative to records in 2021; consolidation of the market share among the exchanges; and increased regulatory scrutiny.

“Exchanges will have to comply with more stringent regulatory requirements, although it is likely to take several years before regulators employ a robust enough framework,” CryptoCompare said. “Regulated exchanges could be the long-term winners from the FTX crash.”

CME Group

Regulated derivatives exchange CME Group reported on Jan. 4 that the average daily volume of its cryptocurrency contracts increased 82% in 2022 from a year earlier. In addition, CME achieved a record Ether microfutures average daily volume of 19,582 contracts.

Arcane Research said in its 2022 review that CMEs were fairly stable at 10-15% of the crypto derivatives market throughout 2022, but saw a brief rally after FTX crashed in November. CME only accounts for 4% of the trading volume in the market according to the Norwegian research-led digital asset brokerage.

bitcoin futures OI

Source: Arcane Research

“It’s somewhat unfair to compare CME to offshore derivatives due to far fewer trading days, but it remains obvious that most bitcoin derivatives trading originates from offshore derivatives exchanges,” he added. Arcane Research. “However, this has been the case since CME launched bitcoin futures, and several price discovery analyzes point to CME being an influential venue for bitcoin price discovery, despite comparatively low trading volumes.” .