Gemini wants to add crypto derivatives trading

US exchange Gemini seems to want to take advantage of the difficult moment of other exchanges to launch its own crypto derivatives exchange platform.

Gemini did not have a good year in 2022, so much so that it was even accused by the SEC of wrongdoing.

In reality, the entire crypto exchange industry has had problems in the US, and these problems will continue into 2023.

Crypto exchanges in the USA

The US is by far the largest market in the world for cryptocurrencies, if only because of the huge availability of capital in the financial markets.

Since they have also long been world leaders in financial markets, over the years they have received deep and well-structured regulation, but it barely touches the crypto sector.

The most heated issue right now in the US for crypto markets is precisely the regulation, because there is still no specific law that regulates them in a special way, and it is not easy to apply rules that are generally valid for financial markets.

In this regard, the most obvious case is the failure of the FTX exchange, which was one of the giants in the industry. It had been founded in the United States, serving primarily the American market, but had moved its headquarters to the Bahamas, where there were fewer controls.

Due to poor corporate, and especially financial, management, combined with almost non-existent controls, it squandered customers’ funds and caused them to lose everything they had deposited on the platform.

Although similar things have happened to perfectly regulated banks, it is absurd and abnormal that FTX was allowed to use its customers’ funds to finance its own expenses.

In theory, those who manage client funds should instead keep the custody of those funds separate from their own funds, and should not use client funds to fund business expenses.

This is just one example of the difference that still exists at the legal and regulatory level between how traditional financial markets are regulated and controlled, and how crypto markets are not yet regulated and controlled.

First and foremost, the customers of apparently regulated intermediaries, such as FTX or Celsius, and the intermediaries themselves suffer.

In this kind of jungle, it can also happen that foreign exchanges, such as Binance, end up operating for years without the proper licenses, due to the difficulty of regulators to verify and intervene.

Gemini and the announcement of crypto derivatives

The only major US exchange to take a different approach in this regard is Gemini itself.

But despite choosing to be based in the state with the strictest regulations regarding the financial markets, namely New York, even Gemini eventually ran into trouble with the authorities from a regulatory perspective.

While even the most regulated crypto exchange in the US can run into legal trouble due to non-compliance with regulations, it can be expected that it will be even more difficult for others to comply with all regulations at all times.

However, this does not detract from the fact that of all the crypto exchanges operating in the US, Gemini is probably the one with the most attitude and ease of compliance.

In particular, the biggest problem, as the recent Binance affair shows, is with derivatives exchanges, such as futures and options.

In fact, in order to offer derivatives trading services in the United States, it is necessary to obtain some kind of license, namely registration with the CFTC. For example, Binance does not have that, so it should not offer US customers the ability to trade crypto derivatives.

As such, on the one hand, Gemini is coming off a very difficult year, while on the other hand, there are big problems in the US for exchanges that want to offer crypto derivatives exchanges.

Gemini: the new platform for crypto derivatives

At this point, and given that Gemini is theoretically the exchange most likely to be in compliance with all US regulations, it would not be surprising at all if it decided to enter the crypto derivatives market right now.

According to The Information, Gemini is working on a foreign crypto derivatives exchange, aiming to offer perpetual futures exchanges to its customers.

The information cites anonymous sources familiar with the matter who say that the decision to set up the derivatives exchange abroad is due to the fact that perpetual futures are prohibited for retail traders in the US, as they are considered a very risky financial product due to the fact that they have no expiration date and can be traded with high leverage.

Also, Coinbase seems to be working on something similar as well, but right now Coinbase itself is under the investment lens of the US government. Gemini, on the other hand, appears for now to have resolved the issues it had with the SEC.

The scenario Gemini is working on would be to act as a market maker for a foreign business so as not to violate US federal and New York state laws.

Bitget’s progress

It is not surprising that in such an environment, some exchanges are leaving which are able to offer crypto derivatives trading without particular problems.

An exchange that is reaping the most benefits from this situation is Bitget, which is not a US platform, but has a US MSB license issued by FinCEN for cryptocurrency trading in the US.

In fact, in 2022 it was named one of the top 3 crypto exchanges by BCG and ranked among the top 10 crypto derivatives exchanges by aggregate open interest.

Bitget was one of the main beneficiaries of the FTX collapse, in terms of number of users and trading volume, perhaps also because it has a user protection fund and was one of the first to activate a backup testing mechanism.

While not the only exchange to benefit from the exit of the FTX behemoth, not many crypto exchanges were actually able to absorb users fleeing FTX.

For example, although Gemini is one of the leading US crypto exchanges, it seems that it has hardly been able to benefit from the exit from the scene of one of its main competitors, perhaps precisely because users who fled FTX preferred foreign exchanges with fewer restrictions.

The future is regulated

However, should the US succeed in introducing robust and effective regulation of crypto exchanges, it is possible to imagine that particularly large capital in the US will end up with a greater preference for US-based and fully regulated exchanges.

At this point, that scenario still seems remote, considering that there are still many restrictions on crypto exchanges that want to offer their services to US customers, and considering that progress on the crypto regulation bill in the US appears to be slow.

However, the future seems to lie in requiring even centralized crypto operators to have similar robustness and integrity to traditional exchanges.

The decentralized world is another matter, but when people are forced to entrust their money to individuals or organizations who become the exclusive custodians of it, they should at least be confident that they are able to store and manage it so thoroughly as possible. This is not yet possible in the crypto markets, but sooner or later it may become possible.