London Stock Exchange Group (LSEG) business and trading startup Global Futures and Options (GFO-X) have partnered to create the United Kingdom’s first centrally cleared trading venue for digital asset derivatives, expected to launch in the fourth quarter of 2023. LCH SA, the Paris-based subsidiary of the LSEG clearinghouse, is set to provide clearing services for dollar-denominated, cash-settled Bitcoin (BTC) index futures and options contracts traded through GFO-X. The facility will be regulated by the United Kingdom’s Financial Conduct Authority to operate a multilateral trading facility.
Arnab Sen, CEO of GFO-X, refers to the company as “the UK’s first regulated and centrally cleared trading venue focused entirely on digital asset futures and options.” LCH SA has created a new, segregated clearing service called LCH DigitalAssetClear. Frank Soussan, head of LCH DigitalAssetClear, expressed excitement for this rapidly growing asset class: “Bitcoin index futures and options are a rapidly growing asset class, with increasing interest among institutional market participants looking for access within a regulated environment they are familiar with.”
The growth of digital assets has enticed traditional financial institutions and other major corporations, with Samsung launching a Bitcoin exchange-traded fund on the Hong Kong Stock Exchange in January, and the Tel Aviv Stock Exchange seeking to expand its crypto trading by offering crypto trading services. Recently, a Boerse Stuttgart Digital subsidiary was granted approval from German regulators to offer crypto custody services. Additionally, Nasdaq is expected to launch a crypto custody service in the first half of 2023.
Institutions are moving into digital assets as the market continues to grow, and the regulatory environment becomes more welcoming. The development of a regulated and centrally cleared trading venue focused entirely on digital asset futures and option contracts could add momentum to this movement.
The benefits of having a trading venue for digital asset derivatives include higher liquidity, better price discovery, and more significant trading volume. Furthermore, it would be extremely beneficial to institutional investors looking to invest in cryptocurrencies with a familiar and regulated exchange. Institutional adoption of cryptocurrencies has long been predicted, and it seems the industry is finally moving in that direction.
One of the key factors necessary for the institutional adoption of cryptocurrencies is the regulatory environment in which they operate. The GFO-X platform, with LCH SA providing regulated clearing services, satisfies the need for institutional-grade infrastructure for digital assets. Regulated exchanges provide institutional investors with a level of comfort and familiarity to which they are accustomed. Increased adoption of digital assets by institutional investors could lead to greater stability of this market, and hence digital assets will continue to gain more mainstream recognition as an asset class.
As institutional investors become more familiar with cryptocurrencies, it is hoped that digital assets will become more widely accepted as an investable asset class. With appropriate infrastructure, custodianship, and regulatory oversight, cryptocurrencies can achieve mass adoption by institutional investors. The creation of this trading venue is expected to create the necessary infrastructure needed for institutional investors to enter the digital asset market, which could enhance the stability and recognition of digital assets.
The ability to trade derivatives on digital assets may also add to the utility of cryptocurrencies. Derivatives like futures and options can be used for risk management as well as for trading. Institutional investors seeking to manage risk in their portfolios could use derivatives like futures and options on digital assets as an effective tool. Furthermore, having more infrastructure for trading futures and options will lead to better price discovery and greater liquidity, both of which are valuable components for an effective market.
The creation of a regulated and centrally cleared trading venue for digital asset derivatives in the United Kingdom represents a significant milestone in the institutional adoption of digital assets. The platform will provide higher liquidity, better price discovery, greater trading volume, and a familiar environment for institutional-grade investors. Moreover, the platform will facilitate the adoption of digital assets as a legitimate asset class. As institutional adoption of cryptocurrencies continues to grow, so will their importance in the global financial system.
