Investors will favor financial institutions with long regulatory track records like the Chicago Mercantile Exchange's crypto derivatives exchange, the bank's new research report predicted.
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The Chicago Mercantile Exchange's crypto derivatives exchange could be one of the biggest winners in the collapse of the FTX exchange earlier this month, according to JPMorgan.
In a Nov. 24 research report, Nikolaos Panigirtzoglou, the bank's top digital asset strategist, predicted that the bankruptcy of the world's second-largest cryptocurrency exchange would lead to both a tougher regulatory climate and a shift by institutional investors into regulated exchanges like CME Group, which he said will likely emerge "as a winner."
That would be particularly true in the crypto derivatives market where, "several institutional investors such as hedge funds [got] trapped via their derivative positions at FTX," Panigirtzoglou noted. "There is likely to be [a] greater shift towards regulated venues such as CME for both futures and options."
That same dynamic will apply to the crypto custody business at both the retail and institutional level, Panigirtzoglou's report said.
Just as top cold wallet hardware providers Ledger and Trezor are seeing "exponential" sales growth since FTX went belly-up, "the main beneficiaries of the FTX collapse are institutional crypto custodians with large balance sheets and established reputation," he predicted.
"Over time these trusted custodians will likely dominate over relatively smaller crypto-native custodians or crypto exchanges."
Among the big traditional finance, or TradFi, names that jumped into crypto custody this year are Bank of New York Mellon and Fidelity Digital Assets, while others have partnered with crypto-native custody firms — like State Street's March deal with London-based digital custodian Copper.co.
What FTX's collapse won't do, Panigirtzoglou's report predicted, is drive institutional investors to decentralized finance, or DeFi, noting that risk is more difficult to assess, DeFi's security problems are greater and that the traceability of orders on decentralized exchanges (DEXs) might reveal trading strategies.
Regulation Boost
This trend towards traditional finance, JPMorgan's Panigirtzoglou argued, will be helped along by both new regulatory initiatives and a speeding up of the passage and implementation of crypto guidelines already under consideration.
In the EU, where the Markets in Crypto Assets (MiCA) bill is ready to be voted into law by the European Parliament, this could take the form of a reduction in the length of the planned 18-month transition period before its regulations go into effect.
In the U.S., where crypto regulation is still at the stage of dueling legislative proposals, it will likely hasten the negotiations over core questions like which regulator will be responsible for overseeing crypto — the main contenders are the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), with the biggest issue being whether (and which) tokens will be classified as securities or commodities.
Beyond that, Panigirtzoglou predicted that new regulations will focus "on unbundling of broker/trading/lending/clearing/custody activities as in the traditional financial system," noting that big centralized exchanges like FTX combined all these activities, "raising issues about customers' asset protection, market manipulation and conflicts of interest."
