The Evolving Landscape of the Crypto Ecosystem
The cryptocurrency ecosystem has made significant strides since the catastrophic collapse of Sam Bankman-Fried’s FTX, which erased billions in investor wealth in 2023. However, experts from traditional finance (TradFi) assert that the industry must undertake further steps to fortify itself against future crises. This was a key takeaway from the “Views From Wall Street to Crypto” event held at Consensus Hong Kong on Wednesday.
Gautam Sharma, CEO and CIO of Brevan Howard, emphasized the considerable advancements in technology over the past 18 months. He noted, “You have traditional players who have come into the space now, especially for us, most of our trading happens off exchange settlement, where you actually keep your assets on custodians while you are able to trade on exchanges.” However, he cautioned that there is still much work ahead in terms of risk management.
Sharma underlined the necessity for continuous, 24/7 risk management, addressing critical areas such as market, counterparty, and credit risks. Counterparty risk, in particular, poses a significant threat in the cryptocurrency realm. This type of risk arises when one party involved in a transaction fails to fulfill its obligations, leading to potential losses for the other party. Unlike traditional finance, where banks and clearinghouses act as intermediaries to ensure trust and facilitate settlements, the crypto space operates with a higher level of counterparty risk.
Fabio Frontini, founder of Abraxas Capital Management, shared his insights on the matter, stating, “When we do arbitrage, the counterparty risk is the most important one,” while also highlighting the importance of credit risk. He advocated for the implementation of rigorous stress testing simulations, particularly in the context of the perpetual futures market. In this market, users risk losing their margins when they are stopped out of a trade—a phenomenon not typically seen in traditional markets. “It [stress testing] can be very rewarding, when done properly,” Frontini elaborated.
Mike Kuehnel, CEO of the market-making firm Flow Traders, added another layer to the discussion by stressing the importance of transparency in innovation. He asserted that to regain investor confidence, the industry must ensure “availability of data and moving liquidity without fragmentation around it.” Kuehnel emphasized the critical nature of having “the best price and giving you the possibility to transact whenever you want to.”
Liquidity surfaced as a major concern in the wake of the FTX collapse and its affiliated entity, Alameda. Although there have been improvements in order book depth for major cryptocurrencies, the fragmentation of liquidity across various decentralized finance (DeFi) platforms, blockchains, and networks continues to pose significant challenges for the market.
