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Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found at https://www.ft.com/tour. https://www.ft.com/content/b4fa13c7-7b4b-469b-8401-638c85e79289 The boundaries between cryptocurrencies and traditional asset classes are blurring ever further, as established Wall Street players make trading digital assets part of their main business — and companies native to bitcoin push into mainstream markets. The arrival of institutional investors into the $1.3tn digital asset market has meant the influence of big banks and professional traders has grown. As a result, the relationship between the price of mainstream assets, such as stocks and bonds, and crypto has tightened. But, so far, the majority of these established investors can only trade derivatives of bitcoin, rather than cash contracts, which has concentrated the influence of Wall Street into futures markets and over-the-counter (OTC) contracts, such as ‘non-deliverable forwards’. And this focus on derivatives has intensified competition from exchanges for a growing part of the digital asset world. The influence of professional traders on the market is already noticeable, says Adam Farthing, chief risk officer for Japan at crypto-specialist market maker B2C2. In recent weeks, cryptocurrency markets had one of their largest ever shake-outs after Tether, a leading stablecoin that should be valued in line with the US dollar, broke its peg to the currency. This sent reverberations through digital asset markets, wiping out billions of dollars worth of trading positions. Bitcoin and ethereum, the two largest crypto tokens by market value, have chalked up double-digit losses since the start of the month. However, Farthing notes that price swings have been much more muted in crypto futures than elsewhere, and dislocations between exchanges — which can give rise to arbitrage opportunities — have been fewer than in previous episodes of market turbulence. “With all the doom-mongering around crypto markets, it is worth noting that the futures markets are increasingly behaving in a mature manner,” Farthing says. Recent volatility has also pushed trading in crypto futures contracts on the Chicago Mercantile Exchange (CME) to record highs, as professional traders seek to confine their digital asset trading to a highly regulated market place. But retail clients trade even larger volumes of futures contracts per day on offshore exchanges, which are less strictly regulated. These include FTX, Binance, and OKex. Derivatives, such as futures and options, are attractive as they enable investors to wager on price moves within a pre-agreed timeframe, while only putting down a small fraction of the value of their trades in advance. However, this ability to leverage trades amplifies the outcome, which means the scale of potential losses is much larger. With all the doom-mongering around crypto markets, it is worth noting that the futures markets are increasingly behaving in a mature manner Adam Farthing, chief risk officer for Japan at crypto-specialist market maker B2C2 For highly-regulated institutions like banks, futures are also easier to manage from a credit, compliance and legal point of view because they do not involve the physical delivery of the underlying asset. With these advantages now fuelling more professional trading of crypto futures, exchanges are racing to become the biggest in this market. Competition between exchanges for a slice of the digital coin market has become fiercer than ever — even as cryptocurrency markets experience one of their biggest ever meltdowns, and fears grow that a prolonged period of low activity could dent trading revenues. “While there isn’t so much a hard limit on the number of exchanges the crypto market can support, it’s likely that a few main players will emerge over time,” predicts Nicky Maan, chief executive of Spectrum Markets, which offers securitised crypto derivatives to investors. “I expect we will see significant growth [on exchanges] compared with OTC in the next five years,” he adds. Traditional exchanges are also keen to get a slice of the lucrative crypto trading market, having spent years watching their start-up peers in digital assets reap attractive rewards. Cboe and the CME were the first to launch futures contracts on bitcoin in 2017. Now, Switzerland’s SIX exchange and Eurex are also offering types of derivatives. Traditional exchanges have spent years watching their start-up peers in digital assets reap rewards © Christopher Dilts/Bloomberg At the same time, specialist crypto exchanges are slowly nudging into highly-regulated US derivatives markets. They are doing so partly to satisfy demanding retail customers, who want to trade products and contracts spanning all markets. But the leading crypto exchanges also have half an eye on entering traditional professional markets. In recent months, several crypto exchanges have made acquisitions of small traditional exchanges — to hasten their push into conventional markets, particularly in derivatives. New crypto exchanges are making inroads, too. There are now 526 exchanges for cryptocurrency trading, according to coinmarketcap, a data website, and some recent entrants have been gaining strength, especially those that target professional investors. Bullish, the platform backed by a number of billionaire hedge fund owners, has had a promising start since late last year. “We launched Bullish right around Christmas time and today we are over $2bn of traded volumes in bitcoin, the same amount as Coinbase,” says Tom Farley, chief executive of Bullish’s special purpose vehicle, which it will use to float on the stock exchange later this year. Recommended Coinbase Coinbase trading volumes plummet as ‘crypto winter’ sets in And some of the ideas that crypto exchanges are bringing to traditional markets are innovative. One is 24 hour trading, seven days a week — a schedule that’s normal for computerised digital markets, but alien even to currency trading, which only operates five days a week. Other crypto initiatives are more controversial. Sam Bankman-Fried — billionaire owner of FTX, one of the world’s largest crypto exchanges — has rattled the stalwarts of the futures market by making a proposal to US regulators that could wipe out brokers from markets. He argues that risk management should be done by computers in all markets, just as it is in crypto. This suggestion hasn’t gone down well with brokers since it would, in effect, give them no role. However, the Commodity Futures Trading Commission (CFTC), the US derivatives market regulator, has launched a consultation about the proposal, which could see large banks such as Goldman Sachs cut out of trades. The CFTC is considering whether to allow Bankman-Fried to sell leveraged crypto derivatives to retail investors and settle their trades directly, cutting out intermediate financial brokers from the process. While there isn’t so much a hard limit on the number of exchanges the crypto market can support, it’s likely that a few main players will emerge over time Nicky Maan, chief executive of Spectrum Markets In crypto, that’s already the norm as most of the exchanges also act as brokers. They not only match trades but manage their clients’ positions — sparking some unease among regulators about the potential for conflicts of interest. Bankman-Fried’s idea already has some fans, although regulators have yet to decide if they’re onboard with his suggestion. Chris Perkins, president of investment management company CoinFund, is in favour, having come round to the idea. He used to run one of the world’s largest futures intermediary businesses when he worked at Citi, the US bank — which is exactly the type of business that Bankman-Fried’s proposal could close down. “I’ve spent my career building one of the most prominent regulated derivatives businesses in the world,” explains Perkins. “I was the intermediary.” But, having joined the world of cryptocurrencies, Perkins has had a change of heart. Intermediaries, he believes, should go. “I’m going to be honest with myself and say you know what: [Bankman-Fried] is right.” Whether regulators agree with Perkin’s conclusion remains to be seen. Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found at https://www.ft.com/tour. https://www.ft.com/content/f23c990a-913d-4613-8014-f61d35b6e09d BNP Paribas has joined JPMorgan in using digital tokens for short-term trading in fixed-income markets as some of the world’s biggest investment banks step up efforts to modernise the $12tn market with blockchain technology. The French bank has joined a blockchain-powered network run by its US rival, which has already attracted more than $300bn of deals since its launch in December. The arrangement represents the first steps in efforts to use digital tokens in one of the crucial links of the global financial system. The repurchase, or repo, market is used by investors to borrow high-quality assets for a couple of days, and by central banks to conduct their monetary policies. Three-quarters of deals are backed by government bonds, according to the Bank for International Settlements, making the market a key source of high-quality collateral for banks to fund their balance sheets or find the funds to support their derivatives positions. JPMorgan’s blockchain allows banks to lend out US government bonds for a few hours as collateral, without the bonds leaving their balance sheets. Post-crisis regulatory requirements demand that banks hold large amounts of liquid assets — which can be bought and sold easily even during times of market stress — such as Treasuries as a safety buffer. By tokenising these assets banks can temporarily turn them into collateral for a few hours, but without lowering their safety buffers, which are calculated at the end of each day. The token represents a digital version of a Treasury and borrowers can exchange it for cash. Details such as the length of the loan and settlement time are governed by a smart contract, which ensures that the cash is in the borrower’s account and that collateral locked up against loans is released at the end of the deal. More than $300bn worth of such short-term loans have taken place on JPMorgan’s blockchain technology platform Onyx Digital Assets since December 2020. Joe Bonnaud, global markets chief operating officer and head of engineering at BNP Paribas, said the two main-use cases for the bank were securities financing and intraday repo. “This is not just proof-of-concept work, we see this as part of our efforts to utilise the technology for the whole trading and operations lifecycle as the market evolves,” he added. Scott Lucas, head of markets DLT at JPMorgan, said that the bank was exploring other fixed-income assets against which traders could borrow. “We are looking at broadening the set of eligibility criteria in addition to US treasuries,” Lucas said. More participants are joining the platform, including banks and their clients from Europe, the UK and Asia. JPMorgan has made a big push into digital assets in recent years despite its chief executive Jamie Dimon often hitting a critical note about digital assets such as bitcoin. The bank’s Onyx unit has been experimenting with deploying blockchain technology across traditional markets, with a former senior executive in the division Christine Moy recently noting that JPMorgan was the first bank to provide regulated crypto exchanges with bank accounts. In mid-February, JPMorgan also became the first major bank to set up a presence in the metaverse. Aside from broadening its collateral criteria, the bank is also looking at ways it could provide its professional clients with access to new markets. Tyrone Lobban, head of Onyx Digital Assets at JPMorgan said that the bank was also exploring the possibility of using Onyx as a gateway to decentralised finance markets for institutional investors.