For crypto to mature, regulated derivatives are non-tradable.
Derivatives already account for 70-75% of crypto trading volumes, with institutional players leading the way. Although there are a growing number of regulated offerings, the majority of volume – around 95% – occurs in “offshore” locations, that is, in unregulated or lightly regulated jurisdictions. This exposes investors to risks such as market manipulation and fraud, and leaves consumers unprotected.
Fortunately, there are a growing number of avenues, particularly in Europe, for crypto exchanges to meet the demands of risk-averse institutional investors whose primary concern is compliance, security and regulation.
What we can learn from market history
Historically, spot markets have served as fundamental sources of liquidity and initial venues for price discovery. As markets mature, derivatives markets often take the lead in incorporating broader information and future expectations. This transition has already been seen in commodity and equity markets globally, signaling a move towards more advanced trading strategies – a key indicator of a maturing market.
Similarly, in the crypto space, for a mature and balanced crypto market, it is imperative to have access to both spot trading and derivatives. Futures and options will play – and always have played – a vital role in managing risk, hedging and improving capital efficiency. They are essential for attracting sustainable institutional participation, enabling capital efficiency and offering a wide range of trading strategies.
However, only regulated exchanges will be able to provide much-needed security and compliance for large financial clients. For crypto exchanges to offer EU-regulated crypto derivatives like perpetual swaps, it is essential to obtain a MiFID license. There is no doubt that the growing demand for derivatives is around $3 trillion. MiFID brings the clarity and protections that crypto markets desperately need, giving us oversight that aligns with traditional financial services. This strengthens market integrity and helps combat fraud.
Regulated exchanges can attract a wider range of institutional clients with demand for crypto derivatives. And they can become sources of innovation. The growing appetite for sophisticated products like perpetual swaps reflects the maturation of trading strategies, provided they are regulated. Effectively leveraging these tools is critical to promoting market integrity and creating opportunities for sustainable returns.
Managing real institutional risks
As we have seen in 2024, hedge funds and family offices are diversifying beyond Bitcoin and Ether, focusing increasingly on stablecoins, derivatives and emerging products. These players know that all markets are volatile and that trading has inherent risks – and crypto is no different. Rapid market changes can quickly turn profitable positions into losses. Derivatives, in general, carry more inherent risk than cash markets due to factors such as leverage and complexity, as their value is derived from the underlying assets.
Access alone is insufficient. Although regulated exchanges offer compliant crypto derivatives products, they cannot protect traders from potential losses. They can only offer protection against risky practices, abuse and bad actors.
Compliance is the next essential element of the decentralized and cross-border crypto landscape, where regulatory gaps can amplify risks. Regulators in reputable jurisdictions are implementing stricter standards for platforms offering crypto derivatives, requiring exchanges to register, maintain sufficient capital, and adopt strong anti-money laundering (AML) practices. and know your customer (KYC).
The guard has matured the most since the last increase in terms of compliance.
Institutions need custodians who combine technical expertise in securely holding crypto assets with rigorous compliance akin to traditional asset management. Leading custodians fill this gap with secure storage, operational transparency, and robust safeguards, reducing risks associated with hacks or technical outages.
The result is that institutions are gaining confidence in the crypto market, now that regulated custodians can align with their operational standards.
The industry must learn from past mistakes. Focusing only on liquidity venues lacking adequate licenses in reputable jurisdictions, developed compliance practices and other trust factors can lead to disastrous consequences. “Proof of Reserves” web pages mean nothing without other safeguards in place. Global financial audits (preferably performed by a Big 4 accounting firm), ISO and SOC2 designations are extremely important to consider and prioritize by institutional and individual users when choosing a crypto platform or partner.
Today’s institutional players seek a market that effectively balances spot liquidity with derivatives for risk management and capital efficiency. The complementary roles of spot and derivatives markets can create a stable and growing crypto ecosystem where transparency, security, and compliance facilitate broader participation.
Therefore, exchanges must prioritize regulated products and secure custody if they wish to offer comprehensive trading options to institutional investors by 2025.
