For crypto to fully mature, regulated derivatives are non-negotiable.
Derivatives already make up 70-75% of crypto transaction volume, with institutional players leading the way. While there is an increasing number of regulated offerings, the majority of volume – around 95% – occurs in “offshore” venues, meaning in unregulated or lightly regulated jurisdictions. This exposes investors to risks such as market manipulation and fraud and leaves consumers with a lack of protection.
Fortunately, there are a growing number of avenues, especially in Europe, for crypto exchanges to meet the demands of risk-averse institutional investors whose primary concerns are compliance, security and regulation.
What we can learn from market history
Historically, spot markets have served as fundamental sources of liquidity and initial price discovery venues. As markets mature, derivatives markets often take the lead by incorporating broader information and future expectations. This transition has already been observed in commodity and equity markets globally, signaling 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 derivative trading. Futures and options will play – and have always played – a significant role in managing risk, hedging and improving capital efficiency. They are essential to attract sustained institutional participation, enable capital efficiency and provide a wide range of trading strategies.
However, only regulated exchanges will be able to provide the security and compliance essential to large financial clients. In order for crypto exchanges to offer EU-regulated crypto derivatives as perpetual swaps, obtaining a MiFID license is a must. There is no doubt about the growing demand for derivatives – about $3 trillion. MiFID brings the clarity and protection that crypto markets desperately need, giving us oversight that aligns with traditional financial services. This increases market integrity and helps limit 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 maturing of trading strategies, provided they come with oversight. Effective utilization of these tools is critical to promoting market integrity and creating sustainable yield opportunities.
Managing the real institutional risks
As we have seen in 2024, hedge funds and family offices are diversifying beyond Bitcoin and Ether and increasingly focusing on stablecoins, derivatives and new products. These players know that all markets have volatility and trading comes with inherent risks – and crypto is no different. Rapid market changes can quickly turn profitable positions into losses. Derivatives generally have more inherent risk than spot markets due to factors such as leverage and complexity, as their value is derived from underlying assets.
Access alone is insufficient. While regulated exchanges offer compatible crypto derivative products, they cannot protect traders from potential losses. They can only provide defense against risky practices, abuses and bad actors.
Compliance is the next essential part of the decentralized, cross-border crypto landscape, where regulatory gaps can amplify risks. Regulatory bodies in reputable jurisdictions are implementing stricter standards for platforms offering crypto derivatives, requiring exchanges to register, maintain adequate capital, and adopt robust anti-money laundering (AML) and know-your-customer (KYC) practices.
Parental authority has matured the most since the last bull run in terms of compliance.
Institutions need custodians that combine technical expertise in the safe custody of crypto assets with strict compliance similar to traditional asset management. Leading custodians are bridging this gap through secure storage, operational transparency and robust security measures, thereby reducing risks associated with hacks or technical failures.
The result has been institutions gaining confidence in the crypto market now that regulated custodian banks can adapt to their operational standards.
The industry must learn from past mistakes. Focusing solely on venues for liquidity that lack sufficient licensing in reputable jurisdictions, developed compliance practices and other trust factors can lead to disastrous consequences. “Proof of Reservation” web pages mean nothing without other safeguards in place. Global financial audits (preferably from a Big 4 audit firm), ISO and SOC2 designations are extremely important for both institutional and retail users to consider and prioritize when choosing a crypto platform or partner.
Today’s institutional players seek a marketplace that effectively balances spot liquidity with derivatives for risk management and capital efficiency. The complementary roles of the spot and derivatives markets can create a stable and growing crypto ecosystem where transparency, security and compliance facilitate wider participation.
Therefore, exchanges must prioritize regulated products and secure custody if they want to offer comprehensive trading opportunities for institutional investors moving into 2025.
