For cryptocurrencies to fully mature, regulated derivatives are not tradable.
Derivatives already account for 70% to 75% of crypto trading volumes, with institutional players leading the way. While there are a growing number of regulated offerings, the majority of the 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 an increasing number of avenues, particularly in Europe, for cryptocurrency 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 critical sources of liquidity and initial venues for price discovery. As markets mature, derivatives markets often take the lead by incorporating broader information and future expectations. This transition has already been observed in global commodity and equity markets, indicating a shift 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 and derivatives trading. Futures and options will play (and always have played) an essential role in managing risk, hedging and improving capital efficiency. They are crucial to attracting sustained institutional participation, enabling capital efficiency and offering a wide range of trading strategies.
However, only regulated exchanges will be able to provide the security and compliance essential to large financial customers. For crypto exchanges to offer EU-regulated crypto derivatives such as perpetual swaps, obtaining a MiFID license is a must. There is no doubt about the growing demand for derivatives: around $3 trillion. MiFID provides the clarity and protection that crypto markets desperately need, giving us oversight that aligns with traditional financial services. This increases market integrity and helps curb fraud.
Regulated exchanges can attract a broader range of institutional clients with demand for crypto derivatives. And they can become sources of innovation. The growing appetite for sophisticated products such as perpetual swaps reflects the maturation of trading strategies, provided they are accompanied by oversight. Effectively leveraging these tools is critical to promoting market integrity and creating sustainable performance opportunities.
Manage real institutional risks
As we have seen in 2024, hedge funds and family offices are diversifying beyond Bitcoin and Ether, increasingly focusing on stablecoins, derivatives and emerging products. These actors know that all markets have volatility and that trading carries inherent risks, and cryptocurrencies are no different. Rapid market changes can quickly turn profitable positions into losses. Derivatives generally carry more inherent risk than spot markets due to factors such as leverage and complexity, as their value is derived from the underlying assets.
Access alone is insufficient. While regulated exchanges offer compliant crypto derivatives products, they cannot protect traders from potential losses. They can only provide defenses against risky practices, abuses and bad actors.
Compliance is the next essential piece of the decentralized, cross-border cryptocurrency landscape, where regulatory loopholes can amplify risks. Regulatory bodies in reputable jurisdictions are implementing stricter standards for platforms offering crypto derivatives, requiring exchanges to register, maintain sufficient capital, and adopt robust anti-money laundering (AML) and know-your-customer (KYC) practices. .
Custody has matured the most since the last bull run in terms of compliance.
Institutions need custodians who combine technical expertise in securely holding cryptoassets with rigorous compliance similar to traditional asset management. Leading custodians close this gap through secure storage, operational transparency, and robust safeguards, thereby reducing the risks associated with attacks or technical failures.
The result has been that institutions are gaining confidence in the cryptocurrency market now that regulated custodians can align with their operating standards.
The industry must learn from past mistakes. Focusing solely on liquidity venues that lack adequate licenses in reputable jurisdictions, developed compliance practices, and other trust factors can have disastrous consequences. “Proof of Reservations” web pages mean nothing without other safeguards in place. Global financial audits (preferably from a Big 4 accounting firm), ISO and SOC2 designations are extremely important for institutional and retail users to consider and prioritize 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 features of spot and derivatives markets can create a stable and growing crypto ecosystem where transparency, security and compliance facilitate broader participation.
Exchanges must therefore prioritize regulated products and ensure custody if they want to offer comprehensive trading options for institutional investors by 2025.
