Digital asset trading group Genesis has begun accepting non-swingable tokens as collateral for loans and derivatives, in a sign that digital art has found its way into the booming market for complex crypto-financial products.
Genesis exploits one of the hottest corners of the digital finance industry by building financial products backed by NFTs, a kind of digital collectible that can be traded on blockchains.
“NFTs come up in almost every conversation,” said Joshua Lim, head of derivatives trading at Genesis.
The market for NFTs rose to $ 40 billion last year, and the enthusiasm around them continued into 2022. Sports-themed digital collectibles are valued at $ 2 billion reach this year in value, after the broader sphere of collectible digital art first hit public consciousness in 2021.
Structuring products around NFTs allows investors to pledge their tokens in a similar way to how a traditional trader would use a high-grade asset such as government bonds to support a financial transaction. However, NFT prices can be highly volatile, adding a further level of risk to the products that Genesis has introduced.
Lim said the company, which is part of Barry Silbert’s Digital Currency Group, follows a “very conservative approach” to valuing NFTs as a setback for loans or transactions and using them as collateral against loans or transactions. He said Genesis only takes “blue-chip” NFTs that have some historical significance or a vibrant secondary trading market.
Genesis is the largest trading desk for professional investors in cryptocurrency markets. In the last three months of 2021, the company underwrote $ 50 billion in loans, raising the year’s total to $ 131 billion. The trading desk handled $ 170 billion in cash and derivative transactions last year.
Derivatives markets in digital assets grew eightfold between June 2019 and June 2021, when a total of $ 3.2tn of structured products from owners on trading venues changed, according to data from CryptoCompare.
Derivatives markets accounted for slightly more than half of the total of cryptocurrencies traded, meaning volumes exceeded those in cash markets, CryptoCompare calculated.
The growth of derivatives markets was partly fueled by the entry of professional participants including banks, as regulatory restrictions mean that such institutions cannot trade in cash crypto markets. It has strengthened volumes of Chicago Mercantile Exchange-listed futures and, more recently, traded over-the-counter crypto-derivatives trading off-exchange.
As a sign of the growing volume of financial assets built on digital assets, the International Swaps and Derivatives Association, the standard institution for derivatives, announced earlier this month that it will develop a digital asset framework.
NFTs are one of the fastest growing segments of the digital asset environment, according to a report by the research arm of digital asset exchange Kraken. Major brands in sports, fine wine, art and fashion have launched dedicated NFTs in recent months, hoping to capitalize on the surge despite investigations into the prevalence of fraud and price manipulation, as well as hacks and counterfeits.