ISDA’s first crypto conference home in about risk and whales

One can bring the whales to crypto waters, but getting them to dive in after the events of the past year will require more finesse.

Why it’s important: Trillions in crypto market cap have been wiped out during the market rout. And while a bounce doesn’t necessarily require institutional involvement, Big Money can help expose the volatility characteristic of crypto markets.

Status: The International Swaps and Derivatives Association’s (ISDA) first crypto-focused conference in New York on Wednesday was in itself proof that the demand is there.

• ISDA represents all market participants in the global derivatives market, such as banks, insurance companies and financial institutions. It has over 1,000 member institutions from 79 countries.
• “General appetite for crypto is growing. Volumes may be suppressed,” said Nicola White, head of liquidity provider B2c2, during a panel called “Understanding the Institutional Trade.
• But much of the talk there was about risk and what it would take to draw more institutions — those who buy wholesale, less retail — for crypto’s next market cycle.

Between the lines: Investors (and regulators) currently seem comfortable with products that are already familiar to them, such as futures and options or financial instruments that provide indirect exposure to bitcoin and ether.

• “TradFi [traditional finance] as a whole are using derivatives to get into the space because there is a lack of regulatory clarity,” White said.
• “But people are getting their products ready.”
• Meanwhile, questions White gets from crypto natives are: “How do options work” and “what is an ISDA” and “why is it important?”

Reality check: These instruments would have come in handy during bouts of market volatility earlier in the year.

• “If the last six months told us anything, [it’s that] it necessitated derivatives,” said Crypto.com CEO Travis McGhee.
• “Speculation is not necessarily bad, but we need the ability to hedge that risk.”

The missing pieces is what is holding back the pace of adoption.

• “Building has been on the buy side. From an infrastructure perspective on the sell side, there is not a full suite of tools to manage day-to-day risk,” said Keith Coyne, head of strategy and product at Cowen Digital.
• White added that there is probably broad agreement that there is infrastructure used by TradFi that is currently lacking in crypto, but that there are also advantages. “Things like settlement…If you settle that quickly, it reduces counterparty risk.”

Of note: For some it was not enough.

• “Post-Three Arrows, counterparties wanted to go to a centralized entity where there was greater oversight,” said Shiliang Tang, CIO of LedgerPrime, describing how clients with an eye on this risk asked to relocate.

• “Derivatives trading usually occurs on unregulated or bilateral OTC and is undercollateralized or undermargined,” Tang said.

Crypto natives are not necessarily stupid to derivatives, but they have been shut out by futures commission merchants (FCM’s).

• “FCM is the gateway to these products, so it’s a bit of a challenge for growth,” Coyne said. “Smaller-sized crypto-native funds struggle to gain access.”

What others are saying: Institutions need the clear signal from regulators.

• “Lack of clarity is preventing the next wave of institutional capital from coming to size,” said Brett Tejpaul, head of Coinbase Institutional.
• Yes, but: “More traditional players who have taken a pass in the last couple of cycles, they expect with all the activity in DC, clarity will eventually come,” said Cboe Digital chief operating officer Matthew Trudeau. “They don’t wait.”

The bottom line: “What’s different now compared to last time – crypto adoption came over short-term price speculation,” Tejpaul said. “Crypto as an asset class is starting to have uses beyond that. Gives everyone in the room the sense of being a stakeholder.”