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March 15, 2023

Counterparty risk the top concern for crypto derivatives market - Acuiti Reports

March 15, 2023 -  Participants in the crypto derivatives market are holding less money at exchanges, onboarding with third-party custody providers and calling for greater regulation of crypto-native markets, the latest Acuiti Crypto Derivatives Management Insight Report has found.  

This quarter’s report, which is based upon a quarterly survey of the Acuiti Crypto Derivatives Expert Network, a group of over 70 senior executives from asset managers, hedge funds, sell-side firms, and proprietary trading groups active in trading crypto derivatives and produced in collaboration with Digital Asset Research (DAR) and Cloudwall, marks the first institutional study of how the institutional market has responded to the collapse of FTX in November 2022. 

Over three-quarters of the Expert Network thought that there would be a permanent separation of exchange and custody functions as investors look to reduce concentration risk. Almost as many respondents predicted a heightened regulatory response while around a third predicted consolidation among native crypto markets, a shift of liquidity to onshore regulated markets or to OTC markets. 

However, just 14% thought that the collapse of FTX would result in significantly lower institutional participation in crypto markets, reflecting the ongoing resilience of the industry as it goes through its challenging formative years. 

Since the collapse of FTX, several crypto derivatives exchanges have published proof-of-reserves to reassure investors of their client fund management processes. However, 64% of the Expert Network said that they remained concerned with the quality of proof-of-reserves from most exchanges.

In addition, counterparty risk remained a key concern for the Network with 47% saying that they were very concerned with this risk factor compared with 31% for operational risk, 13% liquidity risk and just 6% for market risk. 

DAR CEO Doug Schwenk said, "The survey results are enlightening and encouraging for the growth of the crypto derivatives market. We're pleased to help fuel this growth with our Counterparty Diligence offering." 

The report also found that the crypto derivatives community was increasing investment in risk management with almost half of firms planning an investment in the next 12 months. The findings also suggested a move away from inhouse builds as the quality and sophistication of third-party software available to the market continued to increase. 

Kyle Downey, CEO, Cloudwall, said, "This survey offers significant, timely insights into the crypto derivatives market post-FTX. Cloudwall's Serenity digital asset risk platform offers a full suite of risk management and pricing tools for crypto derivatives traders to help support this growing market."

Other key findings in this quarter’s report include: 

  • There is strong demand for a volatility index in crypto derivatives markets but it should reference more than just BTC

  • Optimism is high for a recovery in digital assets markets over the next three months with 75% of the Expert Network either quite or very optimistic about the quarter ahead

  • Firms are lowering maximum exchange exposures and diversifying exposures across exchanges following the collapse of FTX

Will Mitting, founder of Acuiti, said: “This quarter’s report demonstrates the resilience of the crypto derivatives market as it recovers from an immensely challenging year. With every challenge the market has faced in its short existence, it has come back stronger and strengthened the foundations.”

Download full report here:


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