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9th August 2023 | Insights

Crypto markets set for market structure evolution

Crypto markets are set for further fragmentation as trading firms look to increase the venues they trade on, the Acuiti and BSO study into connectivity intentions amongst institutional trading firms has found.

Of the firms surveyed that traded crypto, 57% were looking to increase the number of venues on which they traded.

The motivations for trading new markets were numerous with firms getting into the market looking to increase the diversity of their connections and more established firms engaging with exchanges that offered competitive trading cost and margining schemes.

For others, the recent regulatory uncertainty is forcing them to reconsider which markets they trade.

The findings, which are contained within the report Expanding Connectivity: Exploring the Challenges and Solutions for Trading New Markets, suggest that the landscape for venues in the world of crypto still has some way to evolve.

In futures markets, whether that evolution will ultimately evolve into a winner-takes-all market, as is generally the case in TradFi remains to be seen. To date the market remains highly fragmented with market share split across multiple venues.

In the options market, market share is more concentrated with Deribit accounting for almost 90% of volume on a typical day, however, there are signs of fragmentation as the overall market grows.

One key question that will define that evolution is where trading flow will go as regulatory frameworks become established in the key trading jurisdictions.

Different jurisdictions are at different points along the path to implementation. Authorities in Dubai, for example, have already introduced a comprehensive framework for crypto with a separate regulator to oversee the asset class.

In the EU, the Markets in Crypto Assets regulation (MiCA) has been passed into law and will be introduced from next year. The UK government meanwhile has established a consultation into its framework for cryptoasset regulation while other jurisdictions, such as Hong Kong and Switzerland, are also developing comprehensive regulatory frameworks to attract the market.

The impact of regulations on trading venues are twofold: firstly, incumbent offshore-regulated native venues are seeking authorization in areas such as Dubai. Secondly, new venues are launching the EU and UK among other areas under existing regulatory frameworks in the confidence that their domestic regulators will develop rules that will allow crypto trading in a transparent and regulated environment.

Acuiti asked respondents how they thought the landscape for crypto trading would change over the next three years with regards to where flow is traded.

Interestingly, opinion was divided with roughly a quarter of respondents thinking that flow would shift to new onshore regulated crypto markets or that it would remain in predominantly offshore native markets. 15% thought that it would shift to established TradFi markets and 8% that it would move to OTC markets.

The largest percentage, however, – 31% – thought that native markets that gained onshore regulation would increase their market share.

These venues have the benefit of large incumbent market shares and significant retail flows. In addition, they boast established connectivity and familiarity with processes and workflows.

What the future of crypto market structure looks like remains to be seen but, based on the findings contained within this report, the initiative still lies with the incumbents.

Download the full report here: https://www.acuiti.io/expanding-connectivity/