Institutional Crypto Capital Flows

Transcript

Well, ladies and gentlemen, thanks so much for joining us here. There's a lot of stages from which to choose, so we're very pleased that you decided to sit on this session to discuss what's happening in the institutional crypto market, and we have three very special panelists from different vantage points of the industry, asset management, >> [clears throat] >> crypto native exchange, and of course CME being the derivatives powerhouse. Um I guess we can sort of just start with one question, given that we're all US-based, but here in Singapore, how has the, you know, development of institutional product from ETFs to futures

um shifted um the concentration of liquidity from offshore to the United States? >> Yeah, thank you so much, and it's it's great to be back in Singapore. I think when you look at just the evolution of the space, you know, CME first entered this space back in December 2017. You know, we are the natural home, say, for crypto derivatives, and we really helped to to grow this ecosystem. Just considering that when we first launched back then, we were averaging about $100 million a day. Last year, we averaged 12 billion. We have a family of reference rates and real-time indices that are the underlying references for a lot of the spot ETFs.

And what we noticed, particularly with the introduction of of of spot ETFs, is that you started to see really a shift. When you consider like how crypto started, it was primarily retail driven. Perpetuals came along pretty early. Also a fairly retail driven product, but it was really until our futures launched, and then those spot ETFs launched in early 2024, that we started seeing more and more institutions enter the space. Just to put that in perspective, in 2023, we averaged about $2 billion a day.

When the ETFs launched in 20 in 2024, we averaged about $7 billion a day and like I mentioned, 12 billion last year. So, we are seeing more and more institutions come into the space and I would also characterize that the way that these different participants say integrate with with the marketplace, the ETFs allowed for traditional institutions, the hedge funds, the banks to really enter the space where they couldn't previously or weren't comfortable say trading on some of the unregulated platforms or even some of the centralized exchanges, but the ETFs really changed that. And I think a good thing to look at is just look at volume compared say to open interest. When you

see the volume of the ETFs, I think this year they're averaging about $3 billion a day. You look at the AUM, the AUM is about 100 billion. So, very low turnover ratio. You compare that now say to perpetuals, perpetuals extremely high volume, but really low open interest. You tend to see a lot of churn, but you really don't see institutions adapting to those to those products at the moment. >> How would you describe the penetration of institutions?

>> Yeah, I think it's really interesting because you know, what we've seen from traditional clients especially is they still really want to gain digital asset exposure through traditional vehicles. And that's why Invesco has been focusing on really launching crypto ETPs and supporting them since 2019 both in the US and Europe. What we are seeing is higher allocation to to those products. And also, I think they're getting more intrigued by the net utility that can be created, so things like integrating staking into certain products that are applicable. Um, you know, different ways to accept certain spot offerings um in kind. Uh, so that has really I think uh widened the opportunity and hopefully I think what now we're seeing is a movement from more single spot crypto

ETFs to more multi-asset um and complex offerings. And that's really on the the traditional um vehicle side of things. What we're in parallel seeing is uh really a focus on tokenized products. And with that, that is um a different uh right now investor base. It is more um on-chain clients who manage their either entire portfolio or business on chain. But what's interesting is actually who is buying those is actually a pretty global in nature. >> It's interesting. Your answer really captures the dichotomy that exists in um you know, the the phrase institutional adoption, right? On one hand, it could mean the adoption of tokenization of real-world assets. That is to say, you

know, like we're seeing with New York Stock Exchange and other exchanges rolling out um you know, tokenized equities platforms. On the other end, right, it's the actual allocation to to these crypto assets themselves, right? To Bitcoin, Ethereum, and then the long tail. Um Liz, uh one thing that I've always enjoyed in in following the the earnings of of your firm Coinbase is there's been a number of um I don't know if it's every earnings, but they often give an update on the the extent to which um they've expanded the the client base among the top largest hedge funds. Um so focusing on on that sort of allocation element, are you noticing that there's a

net new buyer of of crypto assets? Um what does that sort of um penetration looks like from the outer layer perspective? >> largely agree with both of your comments, which are ETFs are a big driver and it's still pretty early. Um, but we do see net new buyers actually this year in particular because there's been so much more regulatory clarity >> Mhm. >> in the US in particular. People that have been waiting for, you know, a couple years to and you're trying to figure out when not if they would put more um into the space and increase their allocations are really coming to the table. I agree in in the traditional um institutional space they like the

more traditional vehicles. Um so you don't see the same interest let's say in in perps as you would see in, you know, an ETF or or spot, but we're definitely seeing the net new buyer and then I would say more locally, you know, as um you know, there's been a pretty strong AI trade obviously and big tech trade over, you know, the past number of years and so as you start to see some rotation out of that, I think we've seen that's where more of like the active hedge active hedge fund community has been more involved as they use crypto as you know, an an avenue to kind of roll out of some of the big tech and some of the AI and diversify a little bit.

>> I think the rotation is definitely real. I mean, when you think about the gains that we've seen in AI and the um distressed nature of crypto these since 10/10 of last year, um there's an opportunity there. Um so how has >> add a little bit little bit more to that. I think >> I think the other thing that's interesting is that when you saw sort of how institutions started coming into this space, particularly like hedge funds, it was a lot of a basis trading. So it's more arbitrage, not really allocation, but I think the trend that we're starting to see now is that you're really beginning to see the allocators into the space and and and just going back to the point on the ETF, you see the growth in in AUM on those products cuz you see people holding

positions. They're not just there to capture, you know, an arm >> It's a great point. I I mean, what you're describing, right, is this shift from a lot of these tools, these ETPs, ETFs, um from being trading tools to actual access vehicles, right? Um so, how has that changed the Maybe get your take um on how that's changed the dynamics of of this market and its market structure. Um with more institutional flows, have have we noticed any sort of um fundamental changes in maybe the volatility or or the dynamics of of crypto over um these past uh let's call it the past year or so?

>> Yeah, I'll chime in. I mean, it it's still early, but I think with more institutional adoption, um you definitely have a more you have a bid, you know, there's a bid below the market as, you know, crypto sells off, um you see buyers are standing there. Some of the institutional holders are longer holders, right? So, corporates, high net worth doesn't usually sell, they buy when it goes down. Um dots usually are, you know, are net buyers, and so we have seen sort of a bid below. And I think the other thing that's really been um interesting is, you know, we acquired the largest crypto options uh exchange in the world, Deribit, about a year ago and announced the completion

of that integration yesterday with Coinbase Global Exchange, but, you know, you also have the more natural things that many institutions would do when they allocate, which is, you know, sell calls to get yield, maybe buy puts, sell calls, and so you do get some dampening of kind of volatility where if it goes down, they're net buyers, and if it goes up, you have like, you know, market makers that are long a lot of gamma and, you know, are net sellers. You get a the volatility, I think, helps as well. >> But certainly we have seen like volatility come down in the space. Like when we launched Bitcoin futures, volatility was triple digits, well in excess of 100. You look at Bitcoin volatility now and it's, you know, the pretty consistent in the 30 to 40 and really trading near

the historical lows. >> Yeah, and just added to the Bitcoin point, I think that, you know, really what we're seeing is a lot of interest in Bitcoin still. I think the having an ETF wrapper is very powerful to think of that long-term allocation as more of a more of a buy and hold opportunity. >> One thing that we were talking about before while we were waiting in the wings, uh so to speak, in the speaker lines were uh the the narratives, right, that are maybe resonating with institutions. Have Have you folks in your conversations, I know you're you're flying everywhere all the time and talking to all all sorts of allocators, have you noticed that these narratives have have cemented and and people are grokking the value proposition of what these assets present?

>> Absolutely. I think what's really interesting from a narrative perspective is still a ton of interest and excitement among what digital asset investment strategies can be launched, but actually the big shift is really trying to understand the new infrastructure that blockchain technology actually provides and how it's going to impact, you know, their ability to actually provide solutions to clients going forward as well. And so it's really a lot more about how it's fundamentally shift how we operate over time as well beyond just digital asset investment strategies that are still absolutely critical. >> And we've moved from what is it? What's a cryptocurrency? To really now what's what's possible, right? And talk to more and more institutions and it's all about a lot of talks about tokenization and and really how can we tap into that? How can we generate faster settlement times, you

know, how can we create some more capital efficiencies? >> You're a newer entrant, Liz, in in some respects to your former colleagues, um or or folks from your old world see the value more than maybe they did when you left 11 months ago? >> I mean, they're certainly putting their uh, investment dollars behind it, you know, if they think of my old old firm, you know, they're launching their own ETFs, they're obviously getting involved, uh, they custody a lot of Ibit and things like that. So, you know, you're definitely seeing even the large TradFi banks find their space as well in the area.

>> It is pretty well incredible how much investment has actually gone in the ecosystem as well from traditional institutions as well. Again, because of that shift into new infrastructure and they're really seeing the need to actually start building that core capability to be able to launch and manage more tokenized products going forward. >> It almost seems like crypto in many ways is, um, pushing traditional finance towards new products, right? It's almost in the driver's seat in terms of, um, you know, the push towards 24/5 or 24/7, um, perpetuals, and then of course RWAs.

you know, if I don't know the extent to which things like, um, you know, perpetual markets have given an indication to where we'll open on a given, um, you know, over the weekend, um, but it seems like there's there's eyes there, there's attention. do you do you see crypto driving, you know, I guess the question pertains more to you two than Liz, um, non-crypto specific efforts and endeavors? >> Absolutely. I think especially right now when it comes to actually tokenize products, I mean, we're actually like, you know, we're only going to tokenize a product if it creates net new utility, so either net new benefits, um, and that really comes from actually working with

like, you know, on-chain native clients to better understand what their needs are, what are their requirements to build these offerings because right now they are our target audience for delivering these solutions. >> And and I think that we're really moving to toward a world where it it's not going to be TradFi, it's not going to be DeFi, it's going to be somewhere in the middle. Um, you know, it's going to be a more of a hybrid type model and and maybe we don't talk um, high five, for example, but eventually it's just finance, right? >> Mhm. Yeah. But I think you're right. There is I don't think it's crypto that has, you know, kind of driven the progress, but, I think it's actually the firms that trist originally were trading crypto, creating these exchanges, creating these

products, really raised the bar >> Yeah. >> on what's possible. And so, you know, once you get a big retail community around the world that gets used to trading 24/7 on Bitcoin, and then the same on the same venue they can trade 24/7 on an equity perp, suddenly the equity market has to respond to the fact that people are trading Nvidia 24/7 outside the US and there's not that same access for non-US people generally to get access to those same US stocks and even now US people are dying to trade 24/7 as well. And so, I think it's more of the crypto the crypto companies themselves and the way that people traded have now actually pushed the bar. And so, you know, at

Coinbase we say that we're like we're trying to improve the financial system through like the use of crypto cryptography and blockchain. And I think that's what's kind of happening. And so, we see it in other parts as well as, you know, once you start talking about tokenization, we've seen probably the best use cases in tokenization outside of stablecoins in um, you know, tokenized equity trading globally. But now all the institutions are trying to figure out like should I be tokeni- using tokenized money market funds or stocks or things like that as collateral. Is it easier to move that around 24/7 for derivatives collateral around the world, you know, and those types of things. And so, I think it's

just sort of raised the bar. >> Mhm. I think that's fair. You know, you can imagine a future where there's going to be an order of magnitude of new ways to trade a single equity name, right? Um, you'll have a thousand different ways to express a view on any given name or asset, which raises the question of to what extent does that introduce new fragmentation to the market and fragment liquidity? Going back to the uh, you know, kind of first question, where will liquidity be um, concentrated? Um, >> Yeah, fair. I mean, >> Yeah, sure. I mean, I you you you keep seeing um, different platforms now offering perpetual. It seems that you know, everybody seems to be wanting to offer those products. And to your point,

Frank, it it does create a fragmentation issue. But but I think longer term, um, you know, we'll probably see some some consolidation. Um, you know, I think that uh, particularly institutional investors are going to seek uh, trusted, regulated, you know, KYC um, uh, firms um, to to execute positions. So, I think that that will help uh, you know, bring some of that fragmentation in. Um, liquidity is going to continued uh, to remain uh, you know, very important. And I think also, you know, to to the points that that Liz was making, it's those uh, platforms, those exchanges that that could offer a few things, right? And and and and offer sort of like the uh, most choice um, to to a client base

and allow them the ability, say, to settle faster, allow them the ability to to realize capital efficiency so they don't have to have capital allocated across all these different venues. >> Liz, you agree? >> I understood agree with that. You know, I think traditionally we talk about fragmentation of like liquidity on exchanges, um, which is important, but technology has made that we've shown in equities markets or you know, globally that technology can solve that problem. For this market in particular, the real fragmentation that hurts uh, customers in the end is the lack of capital efficiency is that spot trades on one venue, perps trade another venue, options trade another venue. Can you

actually like net your portfolio of equity perps with crypto perps? And so, I think there's two things, you know, in the announcements that we made yesterday about sort of you know, with Coinbase Advanced and having single portfolios and being able to actually get like one margin score and one posting of collateral across all your positions, that's um very cool for the retail investor, but I for institutional investors, that's where like the prime broker comes in. Yeah. And so, what you're seeing and there's there's not many that do it at full service, Coinbase Prime does. There's probably a couple others that do, but the importance for institutional investors of having a full-scale prime broker in the same way you would have it's like TradFi plus, you know, you can you can trade, you can finance, you can get

borrow, you can custody, you can stake, all of that in one place is really the thing that reduces the fragmentation for institutions. Because most institutions aren't going to deal with like the auto liquidations on a single exchange. They're going to want their prime broker to manage that. You know, and that's the big um bringing that together, the prime brokers that can do that are the are the ones that take away the fragmentation and get the capital efficiency for institutions. Without that, I don't think you can have institutional adoption beyond just people buying ETFs.

Like they won't be able to trade anything else. >> Absolutely. And also, the ability to actually operate like these tokenized products actually on chain. Like what we're seeing right now is a lot of issuers are actually issuing these products. We need to actually put them to work, and that's where like the innovation exemption in the US, that's going to help unlock that and really create utility for us to be able to do so. Because, you know, if you look at every tokenized product, it has their own AML KYC requirements, right? Like their own ways to operate, and that needs to really um change. >> What does a prime broker look like in 5 years where you have tokenized equity? So, you know, I'm thinking about the ilk of the Morgan Stanley's and and you know UBS's of the world. Are they routing orders to tokenize venues? How how are

they maybe thinking about those flows? >> Um I mean at this point the majority of that still remains in you know >> It's early. >> crypto backed prime brokers. Um but I think equity tokenization is probably the thing that will force the let's say stratified prime broker to get involved and it's not as obvious at the moment the innovation exemption that the SEC just put forward in the US which actually allows in a a permissive but also very restrictive way the ability to trade tokenized equities in the US. I think that we'll learn from but it's quite narrow. So it's not 100% clear that we're going to have an enormous

amount of tokenized equities trading for in the US in particular but what is clear is that um you know when we talk to our asset management customers you know two thirds of them are extremely interested in using tokenization either for distribution or for money movements and capital and collateral movements. And so I think every prime broker if will have to support that. >> Um now the question is pace of adoption and I think that's the big thing. It's you know with tokenization right now particularly for institutions. Everybody's talking about it. It's like the topic du jour.

Everybody feels like they need to figure out a strategy but there's a network effect that has to happen there. >> You know if if sort of the people who want to use it to collateralize or have to have people who will take it and there needs to be more than just two. And so it's a network effect and so I think the pace of I think it will take longer than people think for the amount of conversation we're talking about right now and in the industry it makes it feel like it's 6 months out. It's probably a couple years. >> We didn't bring our crystal balls to Singapore.

>> But it is driven by institutional market participants, right? I mean, there's more institutional market participants and that's where, you know, we need to have more use cases. Like right now, tokenized money market funds have found great product market fit, but we need more tokenized equities, tokenized ETPs, tokenized private credit in order to have, um, you know, more more liquidity and more options on chain. I think there's a lot of great progress with what's happening, um, around stablecoin adoption. Uh, nationally, we will help really uh, enable flywheel to have more, um, liquidity to be able to, um, launch more tokenized products. >> But I think the other thing that we'll need, right? Cuz to the to the point that you made is that right now, we do have prime brokers in the space, but but they're, you know, say crypto, uh, prime brokers.

But I think what we really need is the are the banks to really step into the space cuz if you want to do these businesses at scale and you want to see larger institutions come in, I think that you really do need the banks to to start playing ball. >> Liz is showing them how it's done. >> [laughter] >> Trying. >> So, what do we think is the most overrated and underrated, um, element of crypto institutionalization that, uh, you know, captures the zeitgeist? >> I would say, you know, I think the most overrated is what we what we just mentioned is that everything's going to happen all at once. Like this is going to take time. I mean, it is pretty staggering some of these estimates we're seeing. You know, I think that, um, a large bank estimated that by 2030, the bull case is over a trillion. That's a

little over the little over 3 years away. Um, same with stablecoins from, uh, 300 billion to 3 trillion, um, by 2030 as well. Um, underrated, uh, we're very excited for vaults. You know, thinking of, you know, really, um, rules-based pooled investment vehicles really brings a lot of opportunities, um, uh, for new solutions to enter for clients. >> Yeah, I I I think, um, overrated, you know, we spoke a lot about tokenization, for example, um, but we have to realize that it it's it's not a panacea, right? Um, you can't tokenize everything. Not everything should be tokenized, but it's a step in the right direction. It's going to take a take take take a little time.

And I think underrated at You know, just going back to that point on perpetuals, I think the movements that we've seen with the introduction of ETFs has been really underrated by the space cuz I think that the ETFs and and the futures that you know that the back them and liquidity the futures are back them has really been instrumental in bringing institutions in into crypto. >> I think overrated. I said it in my last answer. I just think tokenization is going to take some time, but it will change things. It will make the It will make the financial system better. I mean, there does need to be sort of a rewrite of that infrastructure, but it's going to take some time.

Underrated, I actually think is not giving credit to this industry for how much it's actually pushed the TradFi industry. Like somebody, you know, we're going to look back on this, you know, 10 years from now and say we wouldn't have had all the perpification that we're seeing. We wouldn't have had as many thing as many assets suddenly have access for people because, you know, you tokenize private equity, private credit. I mean, I think this industry is really driving forward change and forcing the banks and TradFi institutions to to get let more people around the table.

More people have access, more flexibility in how you trade, and I think that's very underrated. >> And you just add that too. It's also that that collaboration is critical. It's actually have this conversion. So, traditional institutions partnering with these on-chain native expertise. So, I mean, like, you know, for us, for example, we in our tokenized products have partnered with Superstate and I see it's been a incredible collaboration taking the best of both worlds and we'll be able to create meaningful products. >> But, [snorts] I think it's an excellent point, right? Cuz when I think about this space, we're competitors in some respects, but we're also collaborating. I think that we all have like the same common goal to to to grow this space, right? So so we can be competitors, but I think that

we're more collaborators than competitors. >> And we need to collaborate to also grow the space. You know, it's still very early days. You know, if you think about how much capital potentially will move on chain, like that ability to collaborate to create industry standards, to create ways to you know, have more interoperability. Like these are real problems that we're having right now that we need to come together to find solutions for. >> Mhm. We could use a little less conferences, I think, though. >> It's a lot of conferences. I'm getting tired. A lot of airline points, though. >> You were in Seoul just last week, right? >> was in Seoul last week. Going to Portugal next week.

It's too much. He agrees. Um so 12 months from now, what do you think will be structurally different about the institutional crypto space relative to today? >> I I think some of the elements are already there, right? Um you know, I think you'll continue to see sort of um spot crypto regulated spot crypto, uh regulated ETFs. I think that that becomes sort of like more of the the access point. But I think what's going to be different then, though, is things like stable coin, the acceptance of um you know, tokenized money market funds and tokenized collateral in general, which will really help to accelerate overall adoption.

>> Yeah, I think the new collateral types is going to be really interesting to watch. >> Absolutely. Yeah, I mean just this um where I started with the two different verticals, I hope from a crypto ETP perspective we see more multi-asset, more complex offerings. Um from a token space perspective, um we need to have more utility use cases. Like again, like that is something where um I think that hopefully with tokenized ETPs especially, we'll see much more meaningful adoption given all the innovation happening there. >> Close this out, Liz. >> I I think the one of the most exciting things now is just the rate of growth of stable coin use. Um and I think that will continue and really accelerate. And that is one of the places where you're seeing people making big bold moves to

blend you know, TradFi and and DeFi here. I mean, we announced a big partnership with Samsung wallet here around using stable coins for cross-border payments, which we announced earlier this morning. We announced a deal with Citibank about being their rails for stable coin infrastructure. And so I will say like just I mean, circulation of stable coins was up nearly 100% last year. I mean, it's the pace is really fast there. And the use cases add they've solved real problems. Like real problems of moving things, you know, moving money over weekends, moving money across borders. I mean, things that the traditional banking system hasn't solved. So that I just think is like like a ball rolling

down the hill right now. It's just going to keep picking up. >> Amazing. Well, let's give them a round of applause. >> Thank you.