Key Insights

• Crypto derivatives traded over the counter (OTC) are the optimal way for institutions to access digital assets through a familiar instrument, without having to adjust systems and processes for blockchain technology

• Complementary best practices, like the development of a crypto ISDA, will cement OTC derivatives as institutions’ preferred way to access crypto

• B2C2 was named the OTC crypto counterparty of choice in a 2022 PWC crypto trading report, based on its ability to combine deep traditional derivatives expertise with crypto-native technology and digital asset know-how

Crypto OTC derivatives provide efficient market access 

Many institutions are unfamiliar with the blockchain technology that underpins spot crypto trading. Beyond fear of the new, it’s a rather understandable caution about their ability to integrate blockchain technology into their legacy systems.  

Institutions have responded by wanting to take the time to evaluate the idiosyncratic features of the emerging digital asset class, before fully committing to a significant technology investment. In the meantime, OTC derivatives are an efficient way to gain entry, as they combine crypto accessibility with derivatives’ traditional ability to provide tailored exposure and manage risk effectively. 

Crypto contracts-for-difference (CFDs), non-deliverable forwards (NDFs), and cash-settled options - traded OTC - are familiar traditional financial instruments now available to counterparties in the digital asset class.

B2C2 already offers these products and its ambitious product development roadmap continues to deliver new products designed to meet the evolving needs of institutional clients. 
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Crypto OTC derivatives trading is growing at a rapid pace

“The extraordinary growth of crypto assets in recent years has become one of the defining features of modern finance. With a market value of around $3 trillion, this is now a well-established asset class that is increasingly attracting the attention of institutional investors and banks. As in any wholesale market, OTC derivatives have a vital role to play in broadening market access, facilitating risk management and price discovery, deepening liquidity, and providing greater certainty and flexibility to market participants,” wrote Scott O’Malia, ISDA CEO, earlier this year in his article ‘Developing contractual standards for crypto derivatives.’

B2C2 has seen first hand the growing appetite for OTC derivatives across its diverse and global institutional client base. For example, in 2021 alone, B2C2 handled over 6.6 million crypto CFD trades. 

B2C2 remains at the forefront of this growth, continuously building innovative  solutions.  In November 2021, B2C2 executed a pioneering bilateral crypto NDF transaction and, earlier this year, executed a similar cleared product, on SFOX, which was another first of its kind. 

As the market expands, it is important not to repeat the mistakes of the past by being thoughtful about market structure and the benefits of transparency and regulation. No one wants to see a repeat of the excesses that led to the GFC in 2007-2008. This is why B2C2 recently unveiled a Dual Digital Asset Instrument (DDAI) that challenges unregulated products by offering a credible alternative. The DDAI provides counterparties with a product that offers decentralised finance-like yields in a regulated centralised finance  environment.

The growth and diversification of derivatives products in the market creates an increasing need to establish greater standardisation to further improve accessibility and allow the asset class to reach its full potential.

An ISDA tailored for crypto

‍In 2018, B2C2 was the first firm to introduce a crypto-specific Master Agreement based on the ISDA standard, to provide legal and credit certainty with a proven methodology. It was an important step towards increased acceptance of crypto OTC derivatives.

The original ISDA Master Agreements helped the tradfi OTC market grow to its current size of over $600 trillion in notional size and roughly $12 trillion in gross market value. But, more importantly, these agreements significantly enhanced the efficiency and certainty of the derivatives markets and counterparties’ ability to manage risk across market conditions.

In March 2022, B2C2 became the first principal crypto trading firm to join ISDA as a primary member. By joining ISDA’s dedicated digital asset working groups and contributing B2C2’s collective expertise, the firm aims to help build an increasingly efficient framework for crypto OTC derivatives by bringing about improved contractual standards.

There are clear challenges in adapting existing traditional finance standards to the fast-evolving digital asset class, but B2C2 believes these are sumountable if the major firms in the industry work together to find the requisite solutions.

Mitigating disruption

The technology industry embraces disruption, some even say it is technology’s purpose. Instead, financial markets often fear change, especially when it impacts contract certainty, but B2C2 believes crypto disruption events can be managed.

The treatment of forks in the protocols underlying digital assets represents one obvious area of concern. Airdrops that involve issuance of a new digital asset to holders of an associated coin or token also need to be addressed. And there is ongoing uncertainty about the regulatory treatment of digital assets in different jurisdictions and the risk of regulatory arbitrage. These are just some of the issues B2C2 expects to help solve as a member of ISDA.

Yet it is important to note that similar problems arise in traditional financial markets and are solved by industry participants. For example, the recent debate over whether Russia is in technical default on its foreign currency debt was a reminder that unexpected real-world problems will always intrude on the details of financial contracts.

Unlocking the opportunity ahead

Unlocking improved OTC derivatives standards will add value across the entire digital asset ecosystem and this opportunity is on our doorstep. It is already simpler and easier to access crypto via OTC derivatives trading than many institutions realise. 

Working together, through associations such as ISDA, the industry has an opportunity to combine the innovation brilliance of digital asset technology with the proven best practices from traditional markets, to transform finance and build the ecosystem of the future. ■

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About B2C2

More than just a liquidity provider, B2C2 is a digital asset pioneer building the ecosystem of the future.

The firm has unlocked institutional access to crypto by providing reliable liquidity across market conditions. B2C2’s success is built on crypto native technology and continuous product innovation, making it the partner of choice for diverse institutions globally.

Founded in 2015 and majority owned by Japanese financial group, SBI, B2C2 Ltd is headquartered in the UK, with offices in the US and Japan.

B2C2 Ltd is registered in England and Wales under company number 07995888 with its registered office at 86-90 Paul Street, London, EC2A 4NE.  B2C2 Ltd is the parent company of the B2C2 group of companies. Products may be provided by different members of the B2C2 group of companies, depending on the jurisdiction of the client and the regulatory status of the product and/or B2C2 group member. B2C2 is a registered trademark.