Nov 15, 2022
Why FTX and SBF may have triggered the next wave of institutional adoption
Over the past week, CF Benchmarks has been fielding many enquiries from existing and potential licensees on the likely impact of the FTX debacle on the digital asset space, and specifically what it means for the steady stream of institutional adoption and regulated financial products that we’ve seen, much of which has been created with CF Benchmarks indices as an integral component. From the CME Bitcoin and Ether derivatives that are settled by our Bitcoin Reference Rate (BRR) and Ether Dollar Reference Rate (ETHUSD_RR) to BlackRock’s institutional Bitcoin Private Trust, our benchmarks underpin the most trusted regulated digital asset financial products.
Nevertheless, the events of the past five months may appear on the surface to have prevented any further institutional interest from culminating in actual products being launched.
From the doomed attempts at financial alchemy of LUNA, and the non-existent risk management practices of the crypto shadow banks Celsius and Voyager, to the outright fraud and malfeasance of FTX/Alameda, the space is now littered with every type of failure imaginable. For any serious financial institution, the prospect of entering the asset class in the short term through a product or service would seem to be a non-starter; the financial, reputational and, most importantly of all, regulatory risks are, right now, far too great.
However, I believe that the FTX episode has now injected significant urgency onto lawmakers and regulators to either accelerate implementation of regulatory proposals (such as MiCA in the EU) or to finalise key decisions such as agency jurisdiction (SEC or CFTC in the US). Ironically, it could well be that the legacy of Sam Bankman-Fried’s career in digital assets is the acceleration of regulatory clarity; but not by the means he had imagined, with his hand influencing the pen of regulators and lawmakers. Instead, his influence might be a regulatory framework precipitated by FTX/Alameda, attempting to ensure that no one will ever be able to repeat his reprehensible actions.
In the medium-to-long term, this spur for regulators is likely to mean that regulatory clarity is finally forthcoming for the digital asset space, with institutions finally getting the clarity they seek; thereby removing the single biggest barrier to institutional entry into the asset class, and perhaps the beginning of digital asset exposure genuinely entering the mainstream investment landscape. There is already some evidence to suggest this might be the case. We may be seeing the beginning of a world where digital asset products and services are offered by traditional financial institutions, alongside the best of the crypto native breed of providers.
CF Benchmarks provides its FCA regulated benchmarks to regulated financial product providers to value, settle and maintain their products and eliminate the risks that can arise from pricing that is not representative of prevailing price or that lacks integrity. To ensure this CF Benchmarks has only ever utilised the market data of exchanges that it has been able to positively confirm meet its published Constituent Exchange Criteria. CF Benchmarks has never been able to validate the conformance of FTX.com or FTX.us to these criteria and hence neither of these exchanges has ever been a utilised as a source of input data to CF Benchmarks indices.