Forging Trusted and Transparent Crypto Markets: Cboe’s Insights at Consensus 2023

Rick Steves

FinanceFeeds had the opportunity to speak with Catherine Clay and John Palmer, the executives at the helm of Cboe Global Markets’ expansion into the digital assets space, and its continued build-out of a transparent, CFTC-regulated crypto spot and derivatives marketplace.

Consensus 2023

Consensus 2023 by CoinDesk, which took place from April 26-28 in Austin, Texas, once again brought together all sides of DeFi, blockchain, Web3, and the metaverse to one of the world’s longest-running crypto, blockchain, and Web3 events.

This year’s conference included world-class speakers from fintech, blockchain, and TradFi, as well as regulatory and lawmaking bodies, such as Circle’s Jeremy Allaire, Custodia Bank’s Caitlin Long, the Commodity Futures Trading Commision’s (CFTC) Christy Romero, Yuga Labs CEO Daniel Alegre, Edward Snowden, and even William Shatner.

Consensus 2023 was announced by CoinDesk as a call to action for developers, investors, founders, policymakers, brands, and others to come together and find solutions to crypto’s thorniest challenges and finally deliver on the technology’s transformative potential. The event came in the wake of the most tumultuous year in crypto history and served as an opportunity to reflect and rebuild.

Cboe Global Markets attended Consensus 2023 on its 50th anniversary

The presence of Cboe at Consensus 2023 provided a much needed longer term perspective to the digital asset space. On its 50th anniversary, the U.S. derivatives and securities exchange operator founded in 1973 shows no signs of slowing down its bet on the digital asset space.

Attending the event were John Palmer, President of Cboe Digital, and Catherine Clay, EVP, Digital and Data Solutions at Cboe Global Markets. Palmer and Clay spoke on a panel about Cboe’s 50-year track record operating traditional markets before entering the digital asset space. Before that panel, the two Cboe executives spoke to FinanceFeeds about Cboe Digital’s differentiators as a CFTC-regulated one-stop shop for crypto spot and derivatives trading.

Consensus 2023 CBOE panel
John Palmer and Catherine Clay

A little history: Cboe Global Markets, formerly the Chicago Board Options Exchange (CBOE), was founded in 1973. The first exchange for listed U.S. options launched on April 26, 1973 and traded 911 options on 16 stocks that first day.

Ten years later in 1983, index options were born with Cboe’s creation of S&P 500 (SPX) options. Another ten years later (1993), the Cboe Volatility (VIX) Index – the world’s barometer of U.S. equity marekt volatility – was launched. In 2004, the Cboe Futures Exchange (CFE) was created to support the development of VIX futures.

In 2010, Cboe went public. In 2015, Clay joined Cboe through its acquisition of LiveVol. In 2017, Palmer joined Cboe through its acquisition of BATS, a global stock exchange operator. The newly combined company was rebranded to Cboe Global Markets and has since significantly expanded its global footprint across North America, Europe and APAC.

“2016 was the year of real change for Cboe, which led to where we are today,” Clay said about the year the BATS acquisition was announced. And years later, with Cboe’s latest purchase of ErisX in 2022, it has entered the digital asset space. Clay continued, “We now have 26 markets in options, futures, equities, FX, and digital assets – a notable asset class expansion.”

Bringing Cboe’s strenghts in traditional markets to digital assets

John Palmer believes the expression ‘crypto winter’ hurts the industry’s perception of the space. The big difference between the two market structures (traditional finance and digital assets) easily explains how and why the collapse took place last year, but things are moving favorably. “We’re slowly starting to see separation of duties, oversight and regulation. What is normal in TradFi is not yet fully developed in digital assets,” said Palmer.

Cboe Digital, which joined FIA’s industry standards body to help build out a proper and robust ecosystem for the crypto assets, has recently welcomed 13 participants as minority owners of its unique syndicate structure. The list of investors include retail and institutional intermediaries, liquidity providers, and brokers.

B2C2, DRW, Galaxy Digital, GSR, Hidden Road, IMC, Interactive Brokers, Jane Street, Jump Crypto, Robinhood, Susquehanna International Group, tastyworks, and Virtu Financial, are the 13 minority investors and share the same message and mission: to grow a  transparent, centralized and fully-regulated exchange and clearing house in the US that they’re used to seeing in other asset classes, said Palmer. Cboe Digital is now also serving retail participants directly, but its focus remains on intermediaries, so that traders can connect to Cboe Digital via the established trading platforms they’re already familiar with.

Palmer said Cboe Digital is still working with its 13 investor firms to shape and add value to the ecosystem. Cboe Digital is looking to add greater competition, choice, and liquidity to the US marketplace for crypto futures, and is working with and awaiting approval from the CFTC  to launch margin futures trading for crypto. With a unified spot market, Cboe Digital will be the first U.S. exchange where participants can more efficiently engage in crypto basis trading, a form of arbitrage trading that allows traders to take advantage of price discrepencies in the spot and futures markets of the same commodity. Cboe Digital potentially plans to also launch crypto options in the future, Palmer added.

Cboe Digital awaits regulatory clarity for layer 1 tokens, options, yield

In a panel at Consensus 2023, Palmer and Clay discussed the need for greater growth and maturation of the digital asset space – including on the technology and regulatory fronts – and adoption from institutional players such as banking providers and market makers.  “It’s still being developed. It happens over time. We’re working together with our regulators, customers and industry partners to build that.”

In late 2022, Cboe became the first major global exchange operator to join the Pyth Network in a milestone for the decentralized financial market data distribution platform for aggregated data. The Cboe executives told the audience at Consensus 2023 that there is “clearly a lot to understand from a regulatory and legal perspective before going forward” when it comes to DeFi and tokenizing real world assets, but the best way to learn is through experience.

As for tokenization, Cboe Digital wants to be part of the neutral third-party service provider segment which facilitates primary and secondary markets. The latter offers a market for these assets to be exchanged in perpetuity, which is important for the stability of the ecosystem for many reasons, including to allow market makers to hedge their risk and add capital to the system.

Cboe Digital’s Palmer shared he was impressed with Consensus 2023 and the strength of the digital asset ecosystem at this point in time. He is also optimistic about US regulation on the matter, which will be “worth the wait”, hopefully this year.

Once there is regulatory clarity, Cboe Digital plans to support trading in more products on its platforms, including offering US-based customers access to layer 1 tokens and options trading. Regulatory clarity is also likely to drive asset managers, insurance companies, hedge funds, and pension funds into the digital asset space, which will be “the most exciting thing for me,” Palmer stated, while noting that a “mad rush” wouldn’t be a sustainable growth pattern. Instead, the market will likely see small pockets of exponential growth with even large banks and traditional custodial firms entering the ecosystem, opening the doors to their customers.

From the perspective of institutional interest and development of the ecosystem, Palmer concluded that the industry has “never been in ‘crypto winter’.”

FinanceFeeds interviews Cboe Digital’s John Palmer

Nikolai Isayev, Editor-in-Chief at FinanceFeeds, had the opportunity to speak with Cboe Digital President John Palmer during the Consensus 2023 event at a time when the European Union brought forth the MiCA framework, approved by the EU Council on May 16.

Could MiCA serve as a roadmap for crypto regulation in the United States? Palmer, a self-proclaimed “optimist” didn’t compromise. “There’s a lot in MiCA to digest. We’re still reading it and trying to understand all the pieces of it,” he said, while noting it is a well thought-out structure at first glance and provides a proper identification of roles and responsibilities. Palmer also praised the framework as a good starting point for any sort of regulation.

A year has passed since the collapse of big crypto names such as Terra/LUNA and Celsius Network, which triggered the infamous ‘crypto winter’. Have we moved from speculation to utility?

“It’s hard to say if it was pure speculation before,” said Palmer, while stating that leverage has been removed from the system, which is likely to reduce the ups and downs previously seen in the crypto markets. Also, builders build in the winter and that has been happening, consistently, and the snowball effect keeps growing. The expansion of blockchain utility goes well beyond financial markets. As Palmer noted, “even genomics are on blockchain.”

Concentration risk ends with regulatory clarity for banks

In regard to financial markets, there are growing concerns of concentration risk due to the hesitancy of banks to provide services to crypto firms. Palmer stated that Cboe Digital has a diversified base of banking partners to help ensure its operations remain resilient, but notes that the movement of US Dollars on and off platforms has become harder.

“For liquidity, it’s a challenge. If participants can’t move USD around as much, they’ll respond to that risk in terms of price, step back and limit their depth, and we need to solve that,” he said. People are building solutions to correct these issues and banks are likely to enter the space to fill that gap. To address concentration risk, the industry must work with regulators.

Still, even fractional banking is not riskless. In the US, banks have FDIC-insured accounts up to $250,000, which means there is capital at risk from there. As the digital asset industry grows, there will be demand for insurance for crypto deposits. If there is none, then users will expect a higher return to compensate for the risk.

In May 2023, the International Organization of Securities Commissions (IOSCO) issued detailed recommendations as to how to regulate crypto-assets and end the frustrating uncertainty around digital assets. Regulatory clarity appears to be on its way.

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