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Regulation and Compliance Are Key to Building Crypto Derivatives

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For crypto to mature fully, regulated derivatives are non-negotiable.

Derivatives already comprise 70-75% of crypto transaction volumes, with institutional players leading the charge. While there is a growing number of regulated offerings, the majority of the volume – about 95% – happens in “offshore” venues, meaning in unregulated or lightly regulated jurisdictions. This exposes investors to risks like market manipulation and fraud, and leaves consumers with a lack of protections.

Luckily, there are a growing number of pathways, particularly in Europe, for crypto exchanges to meet the demands of risk-averse institutional investors whose primary concern is compliance, security and regulation.

What We Can Learn From Market History

Historically, spot markets have served as foundational liquidity sources and initial price discovery venues. As markets mature, derivatives markets often take the lead by incorporating broader information and future expectations. This transition has already been observed in commodities and equities markets globally, signaling a shift towards more advanced trading strategies — a key indicator of a maturing market.

Similarly, in the crypto space, for a mature and balanced crypto market, it is imperative to have access to both spot and derivatives trading. Futures and options will play — and have always played — an essential role in managing risk, hedging and enhancing capital efficiency. They are crucial for attracting sustained institutional participation, allowing capital efficiency and affording a wide array of trading strategies.

However, only regulated exchanges will be able to provide the security and compliance essential for large financial clients. For crypto exchanges to offer E.U.-regulated crypto derivatives like perpetual swaps, getting a MiFID license is a must. There’s no doubt about the growing demand for derivatives — about $3 trillion. MiFID brings the clarity and protections that crypto markets desperately need, giving us oversight that aligns with traditional financial services. This boosts market integrity and helps curb fraud.

Regulated exchanges can attract a wider range of institutional clients with demand for crypto derivatives. And they can become sources of innovation. The growing appetite for sophisticated products like perpetual swaps reflects the maturation of trading strategies, provided they come with oversight. Effectively leveraging these tools is critical to promoting market integrity and creating sustainable yield opportunities.

Managing the Real Institutional Risks

As we have seen in 2024, hedge funds and family offices are diversifying beyond Bitcoin and Ether, increasingly focusing on stablecoins, derivatives and emerging products. These players know that all markets have volatility, and trading comes with inherent risks – and crypto is no different. Rapid market shifts can quickly transform profitable positions into losses. Derivatives, in general, carry more inherent risk than spot markets due to factors like leverage and complexity, as their value is derived from underlying assets.

Access alone is insufficient. While regulated exchanges offer compliant crypto derivative products, they cannot shield traders from potential losses. They can only provide defenses against risky practices, abuses and bad actors.

Compliance is the next essential piece of the decentralized, cross-border landscape of crypto, where regulatory gaps can amplify risks. Regulatory bodies in reputable jurisdictions are implementing stricter standards for platforms offering crypto derivatives, requiring exchanges to register, maintain sufficient capital, and adopt robust anti-money laundering (AML) and know-your-customer (KYC) practices.

Custody has matured the most since the last bull run in terms of compliance.

Institutions need custodians that combine technical expertise in securely holding crypto assets with rigorous compliance akin to traditional asset management. Leading custodians bridge this gap through secure storage, operational transparency, and robust safeguards, thereby reducing risks associated with hacks or technical failures.

The result has been institutions are gaining confidence in the crypto market now that regulated custodians can align with their operational standards.

The industry must learn from past mistakes. Focusing solely on venues for liquidity that lack adequate licensing in reputable jurisdictions, developed compliance practices and other trust factors can lead to disastrous consequences. Web pages about “Proof of Reserves” mean nothing without other safeguards in place. Global financial audits (preferably from a Big 4 accounting firm), ISO and SOC2 designations are exceedingly important for both institutional and retail users to consider and prioritize when they choose a crypto platform or partner.

Today’s institutional players seek a marketplace that effectively balances spot liquidity with derivatives for risk management and capital efficiency. The complementary roles of spot and derivatives markets can create a stable and growing crypto ecosystem where transparency, security, and compliance facilitate broader participation.

Therefore, exchanges must prioritize regulated products and secure custody if they want to offer comprehensive trading options for institutional investors moving into 2025.

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Why Trump’s Tariffs Could Actually Be Good for Bitcoin

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So far, crypto markets haven’t behaved as expected under the Trump Administration. Investors hoped that regulatory reform and policies like a Bitcoin Strategic Reserve would drive prices appreciably higher. But it’s been the opposite. Bitcoin has fallen from highs well above $100,000 at the beginning of the year to a trough in the mid-80,000s for most of March.

Crypto prices have suffered from being increasingly correlated with traditional assets like stocks and bonds, which have been hit by macroeconomic uncertainty. Tariffs — surcharges the U.S. places on imports from other countries — have Wall Street worried about a global recession. Crypto investors have been steering clear of crypto assets, which are seen as relatively risky.

“This is all about markets’ ‘risk appetite’ which continues to deteriorate, and for the time being drives a wedge between crypto assets and gold, which continues to be the ‘safe haven’ of choice,” said Marc Ostwald, Chief Economist & Global Strategist at ADM Investor Services International.

“[That’s] in no small part driven by central bank FX reserve managers, who are seeking to reduce USD exposure, which has long been a source of concern to them.”

As the global financial and trade system becomes more fragmented, investors are seeking alternatives to riskier assets, including dollars. For now, that means turning to gold, which is up 18% year-to-date.

But that could change, said Omid Malekan, an adjunct professor at Columbia Business School and author of «The Story of the Blockchain: A Beginner’s Guide to the Technology That Nobody Understands.» Bitcoin could be the new gold soon enough.

“I think the entire [future] is uncertain and in some ways unknowable, because there are many crosscurrents and both crypto and tariffs are new. Some people argue that crypto is just a risk-on tech asset and would sell off due to tariffs. But bitcoin has found footing in some circles as ‘digital gold’ and the physical variety is soaring on the tariff news. So which will it be?”

In other words, economic uncertainty could lead investors to seek out bitcoin just as they have sought out gold in recent months.

Another note of positivity: the impact of tariffs on crypto could be “priced in” and the worst might be over already, said Zach Pandl, head of research at Grayscale, a leading crypto asset management firm.

President Trump is due to announce U.S. tariffs on Wednesday, April 2, at 4 p.m. ET—what’s known as “Liberation Day.” According to reports, he’ll lay out “reciprocal tariffs” against 15 countries that have levied tariffs against the U.S., including China, Canada and Mexico.

Pandl estimates tariffs have so far taken 2% off economic growth this year. But Liberation Day might actually stop the worst of the pain felt in financial markets. “If we see an announcement [on Wednesday] that is tough but phased, and focused on the 15 countries they seem to be targeting, my expectation is that markets will rally on that news,” Pandl told CoinDesk.

“Potentially once we get through this announcement, crypto markets can focus back on the fundamentals which are very positive.”Pandl said announcements like Circle’s IPO wouldn’t be happening if institutions didn’t have a high degree of confidence in the digital assets sector and the policies around it.

Moreover, Pandl, a former macro-economist at Goldman Sachs, believes that tariffs will increase the appetite for currencies that aren’t dollars.

“I think tariffs will weaken the dominant role of the dollar and create space for competitors including bitcoin. Prices have gone down in the short run. But the first few months of the Trump Administration have raised my conviction in the longer term for bitcoin as a global monetary asset.”

Pendl still believes that bitcoin will hit new all-time highs this year, despite current pessimism around prices. “I wouldn’t have quit my Wall Street job if I didn’t think bitcoin will be the winner in the long term,” he said.

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Stablecoin Giant Circle Files for IPO

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Circle, the U.S.-based stablecoin issuer, is going public.

The firm filed an S-1 form with the Securities and Exchange Commission (SEC) on Tuesday. If approved, the company’s stock will be trading on the New York Stock Exchange under the symbol «CRCL.»

The company said its reserve income from managing its stablecoin-related reserves was $1.7 billion at the end of 2024, representing 99.1% of its total revenue.

Circle is behind USDC, the second largest stablecoin by market capitalization, with $60 billion in supply. The firm’s IPO has been one of the most anticipated in crypto.

It’s not the only crypto-adjacent company looking to go public. Artificial Intelligence (AI) firm CoreWeave (CRWV), which benefits from a strong business relationship with bitcoin mining firm Core Scientific (CORZ), started trading on the public market on March 28.

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GameStop Has $1.5B of Bitcoin Buying Power After Closing Convertible Note Sale

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Bitcoin (BTC) purchases from video game retailer GameStop (GME) could be imminent or may have already begun after the company closed on its offering of $1.3 billion of five-year convertible notes.

The $200 million greenshoe option was fully exercised by the initial purchaser, bringing the total amount of the sale to $1.5 billion. Net proceeds to the company after fees were $1.48 billion, according to a filing Monday after the close of U.S. trading.

Alongside its fourth quarter earnings report last week, GameStop — led by its CEO Ryan Cohen — announced full board approval of an update to the company investment policy to add bitcoin to the GME balance sheet.

GME shares rose 1.35% during the regular session on Monday and are up another 0.8% in after hours action. Bitcoin remains modestly higher over the past 24 hours at $84,900.

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