Crypto Derivatives Market Reshaping: TradFi Invasion and Liquidity Battle

Executive Summary

• TradFi Invasion: Traditional finance (TradFi) institutions are expanding their reach into the crypto derivatives market, challenging centralized crypto exchanges (CEXs).
• CEX Vulnerabilities: FTX collapses highlighted counterparty risks in CEXs, driving institutional demand for more regulated solutions.
• CCP Solutions: TradFi's central counterparties (CCPs) offer security by assuming counterparty risk, which is attractive to institutions.
• Exchange Tactics: CEXs are diversifying their businesses, seeking legal licenses, and imitating TradFi models to cater to institutions.
• Rise of DEXs: Decentralized exchanges (DEXs) offer non-custodial solutions, but face challenges related to liquidity and regulatory compliance.
• Dual Markets: A dual-track market emerges, with TradFi focusing on regulated institutions and CEXs catering to crypto-native investors.
• Crypto Prime Brokerage: Crypto prime brokerage emerges as a solution to aggregate fragmented liquidity across different exchanges.
• Regulatory Warfare: Countries use regulation as a tool to attract capital and shape the global crypto landscape.

The Rise of TradFi in Crypto Derivatives

In late 2025, the global financial landscape witnessed a notable shift as the Singapore Exchange (SGX) announced the launch of Bitcoin and Ethereum perpetual futures on November 24. Concurrently, Cboe Global Markets unveiled its "Continuous Futures," a product functionally akin to perpetual contracts, slated for launch on December 15. These events weren't isolated product announcements but rather a strategic coordination across continents. Traditional finance (TradFi) institutions are now seeking to capture a share of the market dominated by crypto-native exchanges (CEXs) like Binance and Bybit, a market boasting a daily trading volume exceeding $187 billion.

TradFi's Entry Strategies

TradFi is adopting a sophisticated approach, reshaping products to align with regulatory frameworks. SGX, under the purview of the Monetary Authority of Singapore (MAS), has classified its products as compliant by restricting them to institutions and qualified investors. Cboe has taken a more nuanced approach with "Continuous Futures," which replicates the functions of perpetual contracts while avoiding the tainted "perpetual" term. This approach allows the Commodity Futures Trading Commission (CFTC) to approve a functionally similar yet nominally clean product. According to Michael Syn, President of SGX, this move aims to provide institutions with the trust and scalability they've been waiting for.

CEX Challenges and Counterparty Risks

The collapse of FTX served as a turning point for institutions, exposing fundamental shortcomings in the CEX model, including asset opacity, conflicts of interest, and counterparty risks. Institutions struggle to ascertain counterparties and the location of collateral, making them uneasy with the high counterparty risk associated with unregulated offshore crypto exchanges. The dual role CEXs play as market makers, brokers, custodians, and clearinghouses constitutes a structural conflict of interest.

TradFi's CCP Solutions

TradFi offers a structured solution through central counterparties (CCPs) like CME Clear, LCH Digital Asset Clear, and Cboe Clear US. CCPs intervene in each trade via contract novation, becoming the buyer to every seller and the seller to every buyer. This approach guarantees transaction fulfillment, even in the event of default by a counterparty, by utilizing sizable margin pools and default waterfall funds. Rather than selling Bitcoin futures, CME and LCH are offering Bitcoin exposure cleared by a CCP.

CEX Adaptation Strategies

CEXs are positioned to respond to the regulatory squeeze and TradFi incursion through multiple strategies.

1. Legitimization: CEXs are striving to acquire licenses globally.
2. TradFi Imitation: CEXs are replicating TradFi infrastructure, such as Coinbase Prime and Binance Institutional, to offer comprehensive services to institutions.
3. Isolation and Differentiation: CEXs are dividing operations into compliant and non-compliant entities to cater to different regulatory needs.

The Rise of DEXs

Decentralized exchanges (DEXs) offer a radical solution through non-custodial, on-chain trading, eliminating custody and counterparty risks. DEX derivatives markets are experiencing significant growth, with trading volume expected to double from $1.5 trillion in 2024 to $3.48 trillion in 2025.

DEX Models: dYdX and GMX

• dYdX: dYdX v4 aims to provide a CEX-like trading experience on a dedicated layer-1 chain, offering high speed and zero gas fees, targeting institutions and high-frequency traders.
• GMX: GMX uses a GLP multi-asset liquidity pool, offering zero-price impact trading and relying on Chainlink oracles for price data. However, it faces risks related to oracle attacks and the potential for a death spiral in bull markets.

DEX Challenges and Regulatory Constraints

DEX trading volumes pale in comparison to CEXs, making it difficult to execute large orders without significant price impact. Regulatory uncertainty poses a significant challenge for DEXs, as the permissionless and anonymous nature impedes institutional compliance. DEXs must choose between decentralization and institutional adoption until they can address on-chain identity and regulatory reporting issues.

Market Implications and Restructuring

TradFi's entry is creating a dual-track market, with TradFi focusing on regulated institutions and CEXs and DEXs serving crypto-native investors. This division is leading to liquidity fragmentation, creating operational challenges for institutions that require separate risk management, legal agreements, and collateral across multiple venues.

The Rise of Crypto Prime Brokerage

Crypto prime brokerage is emerging as a solution to aggregate fragmented liquidity, offering institutions a unified margin account and access to liquidity across various exchanges. Prime brokerage platforms can connect institutions to CME, SGX, Binance, and dYdX, providing comprehensive trading and hedging capabilities. Digital asset prime brokers are likely to be the eventual winners, bridging the gap between TradFi, CEX, and DEX.

Regulatory Warfare for Liquidity

Countries are using regulation as a tool to attract capital and shape the global crypto landscape. The U.S. is taking a pragmatic approach by approving ETFs and facilitating institutional adoption. Singapore and Hong Kong are aiming to become global crypto hubs through clear regulatory frameworks. The EU's MiCA offers a unified market but may lag in innovation. Divergent regulations will divide liquidity along geopolitical lines, ending the dream of globally unified liquidity.

Conclusion: A Continuous Reshaping

The actions taken by SGX and Cboe in 2025 mark the start of a continuous reshaping in the derivatives market. There will not be a single winner, but a permanent bifurcation of the market. TradFi will secure a significant share of the regulated institutional market, and CEXs will continue to evolve by seeking legitimacy and offering diverse products. DEXs will remain an experimental platform due to regulatory challenges. Crypto prime brokerage will become the real winner, connecting TradFi, CEX, and DEX to provide institutions with comprehensive solutions.