Crypto Derivatives Exchange Awaits Regulatory License
Quedex Limited, a cryptocurrency derivatives exchange, is expected to shortly receive regulatory approval in Gibraltar which should encourage trading from institutional investors.
Wiktor Gromniak, director and chief executive of Quedex Limited, told Markets Media that the company is based in Gibraltar as the jurisdiction has been forward thinking about the regulation of cryptocurrency and digital assets.
Quedex is a crypto-centric derivatives exchange listing futures and European vanilla options. The firm secured $888k of seed financing in 2016 and a test version of the exchange was launched in December last year. Gromniak said smaller firms have been trading.
“Large institutional investors are interested in using the exchange and waiting for our regulatory approval,” he added. “We are in the final stages of our license application and the process should be complete in the coming weeks.”
The US exchanges, Cboe Global Markets and CME Group, started trading Bitcoin futures in December last year. Rival US exchange, ICE, is also due to launch physically settled bitcoin futures next month.
Gromniak said he did not see these larger exchanges as direct competitors.
He said: “We are a crypto-centric exchange with bitcoin as our home currency for cash settlement, and the US dollar underlying our derivatives, so they can be used for hedging. CME and Cboe contracts offer the opposite and so are used for speculation.
Quendex derivatives are margined and settled in bitcoin and only bitcoin is deposited and withdrawn, with clearing and settlement in-house. Gromniak continued that Quedex also trades 24 hours a day, seven days a week.
One of the main hurdles holding back the institutional trading of cryptocurrencies is the lack of trusted custody solutions according to GreySpark Partners. The consultancy said in a report last month: “The market is waiting for big houses such as State Street and Northern Trust to take on this role. Difficulties in accessing liquidity or finding capital-efficient instruments for short or hedge positions is also an issue.”
Gromniak said Quedex will also be regulated as a custodian of crypto assets.
“Security is a priority and we have a proprietary solution,” he added. “We achieve ultimate security by using multi-signature cold storage for cryptocurrencies and end-to-end encryption for communication with the exchange engine.”
Axel Pierron, co-founder and managing director at consultancy Opimas, said in a recent report that custody is often used in the sense of safekeeping for digital assets , without including the additional services that traditional bank custodians provide to clients.
Pierron said: “Given the sensitivity and importance of the crypto wallet private key and the numerous reported hacks and thefts of coins, this aspect of the value chain is of great strategic importance to the development of this industry.”
He continued there are two main methods of safekeeping. Hot storage is online, which is convenient but vulnerable to theft and hacks, as the private key and wallet are connected to the network. Cold storage is offline, and so is safer and more secure, but takes more time to access funds.
“As is often the case in the digital asset world, participants end up with a trade-off between speed and security,” said Pierron.
The consultancy said in its report, Beyond Cryptocurrencies: Order and Progress for Digital Assets, that other challenges in the custody of digital assets are allowing third parties, such as regulators and fund administrators, to receive the relevant information without compromising safety.
“Greater participation from institutional investors will require clarification from regulators and the development of market solutions to address institutional investors’ concerns, e.g., custody,” said Pierron. “Also, a professionalization of the market will be needed for growth, its reputation has been tarnished by financially unskilled crypto-fund managers.”
Opimas estimated that only around 20 out of 400 crypto funds can meet institutional investor requirements. The consultancy also warned that the lack of regulatory clarity is not the sole factor preventing institutional investors trading digital assets.
There is also a lack of expertise and understanding, and narrow support from traditional service providers in the capital markets industry. For example, Opimas said the CME Group and Cboe Global Markets bitcoin future contracts have not seen the kind of growth one would expect if significant institutional money was pouring in.
Another reason for the lack of institutional investors is the limited depth of liquidity in digital assets. However the report said that in early July, the daily turnover of bitcoin was more than $3bn – higher than the turnover of Intel stock on the Nasdaq at $1.6bn – despite the drop in value of cryptocurrencies.
2/ The trading volume of #cryptocurrencies has grown dramatically during the last few years. The #Bitcoin market value was about $8.6 billion in July 2014; only four years later it is more than $115 billion. @OpimasLLC @AxelPierron pic.twitter.com/p1c4HObStE
— Opimas LLC (@OpimasLLC) October 8, 2018
“Turnover of the leading cryptocurrencies have now entered institutional investor-grade status,” added Pierron. “This, coupled with the range of instruments that offer hedging and diversification opportunities, it is clear why certain institutional investors are champing at the bit to enter the lucrative market in a meaningful way.”
Gromniak said Quedex has seen huge demand for new trading pairs for crypto derivatives such as ethereum and other fiat currencies such as a Japanese yen underlying. The exchange could expand to offer volatility derivatives, cryptocurrency indices derivatives, contracts based on bitcoin mining difficulty and physical delivery.
Quedex is also applying to launch a token sale on the Gibraltar Blockchain Exchange Grid, a subsidiary of the Gibraltar Stock Exchange, and trade its QDX token on the GBX Digital Asset Exchange.
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