There has been a veritable explosion in the number of exchanges which trade digital assets, with some sources now quoting there are over 1,150 exchanges in operation although, as in any market, the reality is it is merely a handful which dominate most of the trading. The exchanges are either ‘centralised’ - Coinbase, Kraken, Gemini - or ‘decentralised’ (DeFi) - Airswap, Barterdex, Uniswap - with a report from PwC claiming that 31% of hedge fund managers use DeFi exchanges. The actual types of assets which are traded on these exchanges can be broken down into five categories:

  • crypto spot trading
  • crypto derivative trading
  • NFTs exchanges
  • traditional asset backed securities
  • DeFi exchanges

To date, most of the digital exchanges have typically been established by new organisations with some, such as Coinbase, now being a quoted company on a stock exchange i.e, the NASDAQ. The world’s biggest and purely digital exchange is Binance, remaining private for now. According to Reuters: “Trading volumes in June were USD662 billion, up almost ten-fold from July 2020. On a single day in May, daily volumes hit USD92 billion….Binance is growing in popularity in Britain, where its app has been downloaded 1.8 million times in 2021, and 2.2 million times in total, according to mobile data firm Sensor Tower”. Added to this, Statista reported that, on 25 June 2021, Binance turned over USD17 billion of crypto and its nearest competitor turned over USD10 billion. These levels of turnover are being fuelled by a growing global interest from investors.

Uniswap, the largest DeFi exchange, witnessed USD 1.4 billion in 24-hour daily trading volume on June 17 June 2021. Such volumes have attracted new start-ups such as Singapore-based SynFutures, which has recently raised USD14 million to fund its DeFi exchange. Even the Philippine Stock Exchange has announced that it is preparing to establish a digital exchange, in part to slate the thirst for digital payments which account for 10% of the country’s GDP. It is estimated that there as many as 10 million Filipinos who remit cash back to family and loved ones whilst working overseas. Payments via digital assets are a fraction of the cost of making cash payments, hence the interest from the Philippine authorities to offer a safe and regulated alternative for their citizens backed by the country’s Stock Exchange.

The interest in digital assets, and therefore the demand for exchanges to trade these assets, has been given a further stimulus by those wishing to trade Non-Fungible Tokens (NFTs). In terms of the number of traders, Atomic Market with 440,000 and NBA Top Shots with 400,000 are the largest NFT platforms globally. In the first half of 2021 alone, NBA Top Shots had traded over USD600 million of NFTs. Other brands, such as Playboy, are keen to get involved as it, too, launches a bevy of NFTs. In a very ‘non-techy’ way, Playboy, describes how NFTs work: “Not to get too technical, but NFTs are stored on a blockchain (you know, that Bitcoin stuff). Specifically in this case, the Ethereum blockchain. This gives the art a unique, undisputed identifier. Purchasing the art passes the ‘keys’ to you, giving you a never-ending proof of ownership. And, both you and the original artist will receive residuals from all secondary sales”.

Not surprisingly, institutions are showing a growing interest in digital exchanges and ways that Blockchain technology can be used to modernise traditional trading, improve risk and compliance controls, and be able to gain access to new digital assets. For example, a new digital exchange is being launched by a consortium of Fidelity, ICAP and Standard Bank. Whilst ICAP has offered crypto derivative trading since 2019, Simon Foster at ICAP recently stated: “Client demand to trade spot cryptoassets is significant and growing, with interest coming from our traditional customer base across the different asset classes we operate in”.

In Germany, Bayern LB and DZ Bank are using smart contracts to settle Over the Counter (OTC) interest rate derivatives in conjunction with Deutsche Boerse, the German Stock Exchange. The OTC derivatives market is massive -  as at June 2020, BIS estimated it to be over USD600 trillion p.a. with OTC interest rate derivatives accounting for USD495+ trillion p.a. Also in Germany, Swarm Markets has recently begun trading what it claims to be the world’s first regulated decentralised exchange. Swarm is regulated by the Federal Financial Supervisory Authority (BaFin) in Germany. Financial markets are keeping a close watch since OTC trading is very similar to DeFi trading. Given that the International Swaps Derivatives Association (ISDA) recognised the role that Blockchain technology offers, it issued its Common Domain Model standard, back in 2019, to cover both data and processes. This has not been lost on the US’s Depository Trust and Clearing Corporation (DTCC) which handles USD10 trillion in derivatives and is preparing to use a Blockchain-powered platform with a launch due in Q4 2022.

However, what is potentially very disruptive to financial markets and traders is if we were to see one of the bigger Contract for Difference (CFD) brokers, such as IG, CMC Markets and Plus500, open a digital exchange. Typically, CFD platforms create a synthetic instrument that tracks Apple or Tesla stock prices, but these are, in effect, IOUs issued by the CFD broker (not traded on an exchange) and are non-transferable. The retail CFD market, whilst littered with losses ( typically 67% of private investors lose money trading), is large and has created firms such as IG, itself today being capitalised at over GBP3.6 billion.

It is not simply institutions which are taking an interest in digital exchanges. Tom Brady, possibly one of the most famous American football players ever, has been offered a stake in FTX is an exchange which is helping to blur the lines between traditional stock exchanges and digital exchanges as it offers the ability to trade cryptocurrencies and also offers investors access to 36 traditional equities, but within a ‘digital wrapper’. This allows them to be traded 24/7.  FTX, along with Binance and Bitterx offer tokenised stocks, making it easier for investors outside of the US to trade companies such as Apple, Tesla etc - and to do so 24/7. However, investors need to be aware that the price of a tokenised shares may not be the same as the actual stock since prices can be higher or lower depending on the crypto exchange. Investors also need to remember that, typically, tokenised shares cannot be traded between digital exchanges i.e., if you buy a digital Telsa equity on Binance you are not able to sell it on the FTX platform.

Capital is also pouring into Latin America with Softbank, based in Japan, having agreed to invest USD200 million into Mercado Bank in Brazil, valuing Mercado (a crypto exchange) at USD2.1 billion. It is of note that ICAP, one of the world’s largest FX brokers (established in 1971), is valued at GBP1.5 billion. IG, one of the world’s largest derivatives platforms, was set up in 1974 and today’s market capitalisation is GBP3.6billion. The London Stock Exchange Group which owns and operates the London Stock Exchange is valued at GBP7.6 billion, and the firm which runs NSASDAQ has a market capitalisation of USD29 billion. Yet FTX, (which was created in 2017) is a digital exchange, currently looking to raise USD1 billion, which will value FTX at USD20 billion. A publicly quote digital exchange Coinbase, carried out an IPO in April 2021 and today has a capitalisation of USD50 billion.

Meanwhile, the building of an infrastructure to trade digital assets continues at a pace. Possibly a way to gain exposure to digital assets and their crypto ‘brethren’ is to consider investing digital exchanges. If cryptos, DeFi tokens and NFTs continue to gain in popularity then the exchanges that trade these assets could turn out to be a shrewd investment. Whilst private investors have historically been the driving force for digital exchanges, we are likely to see institutional demand increase following initiatives from the ISDA and the mighty DTCC. This ought to bring even greater liquidity and legislation and, hopefully, the regulatory clarity that this sector needs in order to expand and grow further.