Last month, we co-hosted a webinar about the Derivatives and the Crypto Industry for the coming year ahead with J.M. Consultancy Services Ltd. A rapidly developing market, attention on derivatives in the crypto space is coming in from all directions – from waves of traders to regulators.
In a regulatorily interesting time, we are all curious to know how people running crypto derivatives exchanges are planning for the year ahead. That’s precisely why we invited the following guests for this event: Sam Bankman-Fried, CEO of FTX; Mark Lamb, CEO of CoinFLEX; and Luuk Strijers, CCO of Derebit. Founder of J.M. Consultancy Services Ltd, Matthew Cheung was our host for the event!
Here is our written summary to some of the questions that were asked and answered during the webinar. If you are interested to listen and talk to our guests in future webinars, please follow our Facebook, Twitter, or LinkedIn to be in the loop for new events!
Sam thought that a general roadmap for crypto derivatives could be constructed out of looking at the differences between traditional finance and crypto finance, and expected players in the market to be finding things in traditional finance that a lot of people want tokenizing in.
Another thing that Sam expected to see in the near future was the integration of a lot of different financial products into being under one house and one margin regime. He also expected to see a slow death of isolated margin in favour of cross and eventually, portfolio margin across a wide spread of derivatives products.
In order to grow the derivatives space, Luuk thought that educating the market was paramount to ease people into the market and to prevent people from making mistakes. As such, Luuk went into detail about a new solution that Derebit just launched called the “Derebit Position Builder”. A tool with potentials for educational purposes, the builder allows users to play around and examine the outcome of theoretical scenarios by themselves or with other people.
Mark thought that crypto is currently a retail and speculative driven market, lending itself well to very short term and configurable derivatives. He believed that users want to configure their own payout structures and trades that have very specific payouts and that the market will move to cater to those needs this year. From the professional side of the market, Mark noted that a lot of the traditional market is spread trading, and he thought that this will also be a big part of where the market goes in 2020.
To Sam, the question itself is complicated and the answer depends on the outcome the institution is maximising for. There are some countries where, according to Sam, you are free to do whatever you want, but you don’t necessarily get respect for being there. In contrast, countries with heavy regulation in the space like the United States, Korea, and Japan come with a huge market if you choose to operate within their jurisdictions.
To add, he also mentioned that the answer has changed over the years, citing that Japan was once considered by many to be the most crypto-friendly country, but that has since changed since Coincheck was hacked and the theft of over 500 million USD caught the attention of Japan’s regulatory body.
However, if it was about where to be incorporated, the answer to him was almost always going to be someplace in the Caribbean. According to Sam, the prototype that a lot of people follow was incorporation someplace in the Caribbean and operating out of a hub like Hong Kong or Singapore, and then slowly working their way into other markets.
For Luuk, this was a question that he was intimately familiar with, as he spoke of Derebit’s recent decision to move their headquarters to Panama due to new European legislation. To him, the matter of how crypto-friendly a jurisdiction is has a direct impact on an exchange’s competitive position in the market. In the case of Derebit, he believed that continuing to operate in the Netherlands would have lost them their clients to more lenient regions – thus, the move to Panama.
Mark’s perspective on this question looked toward how the largest and most successful multinational companies structured themselves regulations and directions-wise. He noted that the biggest companies in the world were very retail-friendly; companies that were mostly unregulated or very lightly regulated in their setups.
For Mark, all crypto startups share one advantage; their market is global and you do not need a physical presence in order to operate. As such, optimising regulatory setups for crypto startups is very much possible – CoinFLEX itself was incorporated in Seychelles.
For Sam, challenges that exchanges will face will involve the decisions that they make regarding how your business’ KYC is going to work. For him, this will drastically change how you approach questions regarding compliance, citing Bitmex and Coinbase as examples where exchanges have chosen diametrically opposed approaches towards KYC.
Bitmex is an exchange that went down the route of no KYC but, as Sam noted, now faces a slew of challenges regarding which jurisdictions they can or cannot operate in. Coinbase, on the other hand, lies on the opposite end of the spectrum as an exchange replete with KYC measures. Their challenge as such lay in their customer acquisition. Different approaches will bring on their own suite of different challenges.
To Mark, one of the bigger challenges lied in avoiding the ire of regulators; regulators care about complaints. In many scenarios, it was not so much that you are following the exact letter of the law, because specific laws that apply to crypto derivatives exchanges may not actually exist. As such, in addition to enforcing standard KYC and AML measures, Mark explained that CoinFLEX also works to keep a careful eye on customer complaints.
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