Derivatives make up 70-75% of crypto transaction volumes, with institutional investors driving this trend. However, 95% of these transactions occur in offshore, unregulated markets, exposing investors to risks like fraud and market manipulation. Europe is emerging as a leader in providing regulated pathways for crypto exchanges, focusing on compliance, security, and regulation to attract risk-averse institutional investors. Historically, spot markets have been crucial for liquidity and price discovery, but as markets mature, derivatives markets take the lead, incorporating broader information and future expectations. This shift is evident in commodities and equities markets, signaling a maturing crypto market. For a balanced crypto ecosystem, both spot and derivatives trading are essential. Futures and options are vital for risk management, hedging, and capital efficiency, attracting sustained institutional participation. However, only regulated exchanges can provide the necessary security and compliance for large financial clients. The demand for derivatives is growing, with a market size of about $3 trillion. Regulatory bodies are implementing stricter standards, requiring exchanges to register, maintain capital, and adopt robust AML and KYC practices. Custody has seen significant compliance improvements, with leading custodians offering secure storage and operational transparency, reducing risks associated with hacks or technical failures.
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