Lending markets

Crypto closes in on TradFi infrastructure

According to research by Acuiti, a management intelligence platform, the main consequence of recent crypto price declines will be that the market will move closer to the infrastructure of traditional finance.

Half of the respondents, 50%, in the second Acuiti Cryptocurrency Derivatives Management Analysis Report believe that the main consequence of falling crypto valuations will be that the market will move closer to the TradFi infrastructure. Bitcoin has fallen between $19,000 and $23,000 since mid-June, from a high of over $65,000 in November last year, wiping out $2 trillion in market capitalization according to the report.

In addition, the majority of respondents, 59%, expect a tougher regulatory approach to be the main medium- to long-term effect. The research is based on the views of the Acuiti Crypto Derivatives Network of Experts, a group of senior executives from around the world drawn from hedge funds, banks, brokers, prop traders, asset managers and investors. ‘trades.

Falling valuations and the collapse of crypto hedge fund 3 Arrows Capital, which necessitated the bailout of associated companies, have raised questions about how crypto markets work. The survey found that the most critical concerns were the financial stability of local lenders and prime brokers and risk management practices.

Source: Acuiti

“Ultimately, the systemic impact of the collapse of a relatively small lender in the market reflects not only the need for regulation, but also the risk that emanates from significantly lower levels of capital committed to support the asset market. digital versus traditional financial markets,” the report adds. “There is a noticeable cooling off on native crypto providers in their current form, as evidenced by concerns about the financial stability of stock exchanges and local brokers and lenders.

However, the report also pointed out that it should be noted that most market companies withstood the shock.

The majority of the network, 58%, also believe that banks will play an important role in authorized decentralized finance (DeFi). However, a third, 35%, expect banks not to engage with DeFi at all in the future.

Enhanced Digital Group

The increased institutionalization was demonstrated by Enhanced Digital Group (EDG), which provides structured products to institutions in digital assets, raising $12.5 million in a seed funding round in May this year.

EDG was founded by traditional finance bankers, including Chris Bae, a former member of the management and investment committee of UBS’s more than $40 billion alternative investment group. He also ably managed the currency options and equity derivatives trading desks at Goldman Sachs and Bank of America Merrill Lynch.

Bae, chief executive of EDG, told Markets Media that the company was founded on the thesis that the asset class would become institutionalized. He said: “We structure derivative packages to help solve asset and liability mismatches in the cryptocurrency space and we certainly don’t see anyone else like us today.”

He continued that when the company started in October 2021, institutions could only invest in coins and EDG believed that a multitude of products would have to hit the market for institutions to solve individual liability prospects or horizons. temporal.

Chris Bae, GDE

“We saw a lack of financial engineering in the space,” Bae added. “We wanted to build products in a regulatory compliant way and that became very important.”

The volume of incoming requests from around the world has increased significantly according to Bae, as crypto valuations have fallen and volatility has increased.

“In every market, not just crypto, investors have a Cinderella moment when they think ‘I’ll be out before midnight,'” he added.

EDG operates under US derivatives regulations Commodity Futures Trading Commission and part of the funding round will be for regulatory capital.

“It’s a big differentiator for us because the CFTC swap exemption requires regulatory capital to be kept unimpeded and that’s what we’ve done,” Bae said. “What’s really exciting for us over the next 12 months is that things that need to grow in the institutional ecosystem are happening.”

For example, there is a lack of supply of credit in crypto, without traditional financial products such as pensions, and new players are entering the market to fill this gap.

Bae compared current crypto markets to frontier markets in traditional finance, which are lower than emerging markets. He added: “It affects how you manage risk, as well as trade size and expression.”

EDG’s funding round was led by WebN Group, a research-based incubator backed by Alan Howard, and Genesis, with additional investors New Form Capital, Nexo Ventures, Kenetic, BH Digital, Tribe Capital and the founder of ‘IntoTheBlock, Jesus Rodriguez.

Joshua Lim, Head of Derivatives at Genesis, said in a statement: “As the environment around cryptocurrency and blockchain continues to mature, we have observed a growing need for crypto-native businesses that can bridging the gap between traditional markets and this new financial ecosystem.EDG bridges this gap by developing bespoke financial strategies and products for institutional and retail investors that fit their unique needs.