Arnab Sen Discusses Institutionalization of Digital Asset Markets at FIA Conference

May 21, 2024

John Lothian

John Lothian

Executive Chairman and CEO

May 21, 2024 — Arnab Sen, co-founder and CEO at GFO-X, shared insights on the institutionalization of cryptocurrency trading during an interview for the JLN Industry Leader series sponsored by Wedbush at the FIA’s International Futures Conference in Boca Raton, FL.

Sen highlighted the significant disparity between the trading volumes of Bitcoin and Ether futures compared to options. “The Bitcoin and Ether futures and purchase market is somewhere in the $50 billion of average daily volume (ADV) versus options being $1.5 billion,” he said. Sen said the need for a true exchange model to mitigate the counterparty risks inherent in the unregulated market, which currently handles everything from KYC and AML to price discovery and settlement.

To address these challenges, Sen discussed the importance of setting up a regulated exchange model. “You need to solve for the bank, and to solve for the banks, you have to set up a true exchange model,” he said.

Sen also provided an update on the progress of GFO-X’s UK-regulated futures and options on Bitcoin. “We’ve been regulated by the UK FCA since February of 2022. We’re obviously partnered with London Clearinghouse. We have set up Digital Asset Pay, which is a completely segregated silo focused on the clearing of cash-settled index digital asset index products,” he said. He expressed confidence that regulatory approval would be obtained by the end of Q1, with a go-live expected in Q2 following a period of intense testing.

Discussing the potential for these products, Sen pointed out the significant growth opportunities for futures and options as the market becomes more institutionalized. “If you look at FIA statistics, they had options at 65% of total derivatives last year. The year before that, I think it was somewhere around 45%. So let’s just loosely say options are one for one with futures,” he said. He projected that the options market for digital assets could grow 25 times to align with traditional finance volumes.

Sen emphasized the need for a comprehensive market structure that includes spot, futures, and options to attract large institutional participants. “A market I don’t believe is truly institutional until it has three legs to the story: spot, futures, and options,” he asserted. He explained that institutions require the ability to hedge and manage risk through structured products, which are often underpinned by options.

When asked about GFO-X’s competitive advantage, Sen clarified that they serve a different market segment.

“We set up GFO-X to solve for the 90% of institutions that don’t trade this asset class right now, not the 10% of institutions that do,” he said. He highlighted their focus on large investment banks and institutions, contrasting it with other models that integrate spot and futures on the same platform.

Addressing risk management, Sen assured that their fully regulated exchange has all necessary protections, including circuit breakers. “We have all of the protections that you would expect. We have circuit breakers… and all of the things that large institutions want,” he said. He emphasized that derivatives exchanges help manage volatility rather than exacerbate it, providing essential tools for ETF issuers and other market participants to hedge their products effectively.

Sen concluded by underscoring the role of derivatives exchanges in maintaining market balance and control, which is crucial for the ecosystem’s stability.

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