Cryptocurrency trading is being hailed as a disruptive force for the future of capital markets. Yet many note that it not only bears a stark resemblance to the emergence and evolution of “traditional” financial instruments, but must also adopt some of their established market structures.

While spot trading still occurs in a largely unregulated context, the real innovations that have driven the evolution of crypto market structure have their roots in “traditional” financial markets and instruments—namely, the financially settled bitcoin futures launched in late 2017 by Cboe Global Markets and the Chicago Mercantile Exchange Group (CME).

Now, say these exchanges and their competitors, other elements of traditional market structure are needed, such as clearinghouses and properly defined price discovery that takes place in regulated markets, in order to fully entice institutional capital into the fray.

“As physically delivered, as cash-settled products come online, as spot markets become more regulated, I think you’ll not only see convergence but also price discovery, which will feed into new products,” said Thomas Chippas, CEO of digital asset trading platform and clearing firm ErisX, speaking on a panel discussion at the Futures Industry Association’s annual conference in Boca Raton, Fla. on March 14.

ErisX plans to launch physically delivered cryptocurrency futures, subject to regulatory approval, and spot trading on the same platform. Other major players are also launching professional-grade ventures in this space, such as Intercontinental Exchange Group (ICE), via its cryptocurrency division Bakkt, which will enable futures to be traded and cleared through ICE Futures.

Speaking on the same panel, Adam White, COO of Bakkt, added that the unregulated nature of many spot exchanges is “keeping some measure of institutional capital on the sidelines.”

Yet, while many traders are calling for crypto markets to adopt structures that are more aligned with traditional markets, there are also many who see this as running counter to the innovation leaps enabled by technology such as the blockchain and distributed ledgers.

“I think that crypto, in the future, requires us to have less [of these structures],’ Ron Bernstein, lead for new assets and products at crypto exchange operator Coinbase, told the panel. “I think that’s the ultimate goal for decentralized technology, and I think there will be a way, in the future, to self-custodian—or at least not require a lot of centralized infrastructure.”

That assertion met with immediate opposition from others, who said that not only was trust fundamental to trading activities, it was also essential to encourage further participation in these markets.

“I don’t agree with that. I don’t think, when we talk about financial transactions, we need less trust,” said Tim McCourt, global head of equity index and alternative investment products at CME Group. “I think that’s diametrically opposed to our viewpoint when it comes to central clearing because one of the things with managing risk is you need to understand the rules and have a degree of certainty about how events will unfold when you need to manage that risk. So decentralization may be an attractive aspect of the technology, but central clearing provides the trust to get market participants to do these things that provide liquidity, and you need certainty at the point of liquidity.”

Bakkt’s White added that elements of centralized infrastructure are “inevitable,” given the regulation that already exists around products like futures and other standardized derivatives. While decentralization does have some attraction, he argued, particularly in terms of what can be achieved through technology initiatives—including building distributed applications on top of public ledgers—some of the more extreme examples are clearly unsuitable for institutions.

“I do think that the vast majority of the capital that’s waiting on the sidelines will not commit without custody or mutualized losses like in clearing. They are looking for this asset class to fit into the processes that we’re used to, and that’s where we’ll see the most growth,” White said.

Are Futures the Future?

Beyond forcing artificial structures onto crypto markets, a more organic evolution may be driving a move away from unregulated spot markets towards the traditional futures markets and their established operators.

While the launch of regulated bitcoin futures had the immediate effect of leveling out the mania around bitcoin’s price—and perhaps indirectly contributing to the equally steep decline in the value of a single coin over the course of 2018—these futures are beginning to exert an indelible force on another area of the market that has challenged institutional investors focusing greater attention on crypto markets: price discovery.

“At the moment, price discovery happens primarily on the cash markets. Those are bifurcated between traditional OTC players like Cumberland, Circle and Genesis, but also the lit cash markets like Coinbase, Gemini and Kraken,” said Bakkt’s White. “But what we believe firmly at Bakkt is that price discovery has to occur within an end-to-end regulated ecosystem… Not taking anything away from the cash markets or the OTC markets, but they’re not exchanges with a capital ‘E.’ So I think, right now, most of that price discovery is happening in the cash markets, but we’ll see, with time, it switch to the futures market, and hopefully, Bakkt will be a quote market.”

Others say this switch has already begun. CME’s McCourt said that there have been occasions where volumes on CME bitcoin futures—each contract representing five bitcoins—have exceeded equivalent volumes on spot exchanges, suggesting that price formation is indeed occurring in futures markets.

“When we look at some of the recent volume trends from the spot exchanges, there are some days when futures are doing more than spot in terms of bitcoin equivalent—we have a five-times multiplier at CME—last month we had a record day of a little over 18,000 contracts, which is 92,000-plus bitcoin equivalent,” he said. “So you’re seeing this price formation happening.”

To what extent this will continue is uncertain, however—mere hours before the panel, Cboe announced through an exchange circular that it would not be listing any of its XBT futures from March onwards. While current contracts, which mature up until June, can continue to be traded, the exchange said, the question of whether it would continue to list bitcoin futures at a later date depended on an internal discussion regarding Cboe’s digital asset strategy.