Crypto’s Long Road to Acceptance May Have Started Here

He sent the invitations when the party was over.

Only after the cryptocurrency craze’s collapse hit bottom in December did Standard Chartered Plc veteran Hoe Lon Leng issue his call to the market’s biggest traders: join him to brainstorm making digital tokens part of the world’s financial architecture.

It may seem quixotic, but the goal of the two dozen men gathered Jan. 20 at a resort on Singapore’s Sentosa Island was to create the framework for an orderly market in crypto derivatives—part of every primitive asset class’s journey to acceptance. If they succeed, those hours spent in Sofitel meeting rooms hemmed in between an 18-hole golf course and one of the city-state’s sandy beaches could prove to be a turning point, these true believers say.

“We see this as getting the crypto market into shape in order to absorb the entry of traditional finance firms,” said Simon Nursey, Leng’s former colleague who attended the meeting. (Leng’s crypto initiative is a personal project, and his employer is not involved). “We are witnessing the emergence of a new asset class.”

Such visions underscore the schizophrenic world of cryptocurrencies—digital money that its advocates cheer as the future free from meddlesome officaldom. But alongside finance professionals prospecting for a big score and institutional investors testing it out, a rogue’s gallery of anarchists, criminals and fraudsters has left a stink on virtual currencies that is proving hard to wash away.

“Crypto is now practically a pejorative,” said Eoin O’Shea, a former compliance chief at Credit Suisse Group AG who now runs Temple Grange Partners, a risk and compliance consultancy. “It will need to shake off this taint if it is to go mainstream.”

Yet in the wake of crypto’s 2018 crash, traders flew into Singapore from Hong Kong, Tokyo and New York to join Leng’s caucus.

The gathering brought together traders from firms including Mike Novogratz’s Galaxy Digital Holdings Ltd. and Circle Internet Financial Ltd., which counts Goldman Sachs Group Inc. among its investors, as well as exchanges Binance and Coinbase. Together, the group embodied the first Crypto OTC Roundtable Asia.

They focused on private bilateral derivatives known as over-the-counter contracts, instead of exchange-traded products like Bitcoin futures. Unlike the futures contracts that trade on public markets managed by regulated companies such as CME Group Inc., OTC contracts, including options, are not standardized. They also expose traders to the credit risk of their counterparts.

When Wall Street bankers from firms including Deutsche Bank AG and Goldman Sachs Group Inc. in 2005 created a standardized contract for credit default swaps on mortgage-backed securities, the market boomed, until it melted down just a few years later.

While no official statistics exist for bilateral crypto derivatives trading, Nursey estimates volumes total around $750 million per month across swaps and options contracts. That’s a fraction of the trillions that change hands weekly in the interest-rate derivatives market.

The Singapore meeting gave birth to what will be the first clearinghouse for crypto derivatives to increase trading volume and dramatically reduce trading costs. The venture, known as Liquidity Offset Network, should be operational and regulated by the Singapore Monetary Authority as soon as July, said Nursey, 46, who until November was head of foreign-exchange options trading for Asia at Standard Chartered. The network will be the central counterparty, while the services it offers, including margin calculations and confirmation, are known as OTSafe, according to Nursey, who says he’s financing the network along with a silent partner.

The point would be to eliminate the need for traders to post collateral with each of their counterparties, an arrangement that can quickly exhaust all the resources of a small fund. Were the same fund to face a single central counterparty—in this case the clearinghouse—it would need to hold less collateral, he said.

“It’s very hard to grow a market on a bilateral basis,” said Darius Sit, a Singapore-based managing partner at crypto trading firm QCP Capital who helped Leng organize the meeting. “It is almost impossible to arrive at a system both parties see as fair and equal.”

An accepted guide of trading conventions would also help, laying the ground for institutional investors and Wall Street banks to join, said Nursey. A handful of mainstream finance firms are looking at crypto investments or businesses, but most have steered clear.

For Leng, 44, crypto trading is similar to many of the other nascent markets he has seen in a 20-year career at firms including Tudor Investment Corp., Goldman Sachs and now Standard Chartered. He’s even written an introductory guide to crypto.

The violent price swings and makeshift infrastructure for digital assets are reminiscent of the Asian currency derivatives market in late 1990s, which began with a few in-the-know dealers and grew quickly as the contracts became widely adopted, said Leng. OTC derivatives on Bitcoin, Ethereum and the like could also grow rapidly.

CORA will hold a second meeting in Chicago in May to draw more U.S. traders into its initiative. Such a move could be crucial because of the U.S.’s outsize influence, said Rich Rosenblum, co-founder of GSR, a Hong Kong-based algorithmic trading firm focused on digital assets who did not attend the Singapore meeting.

“Due to weak regulatory oversight in Asia, it will be challenging for initiatives of this kind to have an industrywide impact,” said Rosenblum. “Similar efforts in the U.S. have the opportunity to work with more progressive regulators, which may be the deciding factor in what sets the global standards and legal framework of the future.”