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Participants in the cryptocurrency derivatives market have taken the collapse of FTX on the chin with a stoic step forward for market resiliency; finds institutional report. 

Members of the Acuiti Crypto Derivatives Expert Network are learning from FTX’s November demise by holding less money at exchanges and onboarding with third-party custody providers while calling for greater regulation of crypto-native markets.

According to the latest Acuiti Crypto Derivatives Management Insight report, which is based on a member survey of the 70-strong network, the digital market is making a promising recovery from the disruptions that shook the industry last year.

The report is the first institutional study of how the institutional market has responded to the collapse of the FTX exchange.

The ripple effect

When asked about the long-term impact of the collapse of FTX on the market structure of institutional cryptocurrency, over three-quarters of the Network anticipated 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 liquidity shift to onshore regulated markets or over-the-counter (OTC) markets.

However, just 14 per cent thought that the doomed exchange’s collapse would result in significantly lower institutional participation in cryptocurrency markets, reinforcing what the report describes as ‘the ongoing resilience of the industry’ as it goes through its challenging formative years.

A fine fix?

When FXT began to crumble, several cryptocurrency derivatives exchanges scrambled to reassure investors of the suitability of their fund management measures.

This response was most notable in an email Changpeng Zhao, CEO of Binance, sent to its platform users in the wake of the collapse, which detailed how the exchange handles deposits and why it can ensure the safety of assets in its custody.

Elsewhere, exchanges began to frantically publish proof-of-reserves as reassurance that they were not following the same fate as that of FTX.

Despite these efforts to steady the ship, the report highlights how 64 per cent of the Network retains concerns about the quality of these proof-of-reserves.

Additionally, the findings circle counterparty risk as a key concern for 47 per cent of Network members, above the 31 per cent worried about operation risk, the 13 per cent worried about liquidity risk and the six per cent concerned about market risk.

Unsinkable cryptocurrency derivatives

In response to this concerned consensus, the majority of market participants are or plan to increase investment in risk management, with almost half of the Network’s 70 members expected to do so within the next 12 months.

The findings also suggested a move away from in-house builds as the quality and sophistication of third-party software available to the market continued to increase.

For Acuiti founder Will Mitting, the report “demonstrates the resilience of the cryptocurrency 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,” he continues.

Network member Digital Asset Research (DAR) described the results of the report as “enlightening and encouraging for the growth of the cryptocurrency derivatives market,” while members like Cloudwall called the survey’s insights “timely” and “significant” in regard to the state of the cryptocurrency derivatives market post-FTX.

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 per cent of the 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