The power struggle – Central Bank Digital Currencies

With the advent of blockchain, governments now face what they consider to be a new threat: the ascent and possible hegemony of (government) unbacked private digital currencies. The loss of sovereignty, as well as the exertion of economic influence through fiscal and monetary policy, are the main pain points that worry the decision makers of the worlds’ economies. Additionally, some believe that if remained unchecked, digital assets can affect the traditional banking system, destabilize the economy, and disrupt policy transmission mechanisms [1]. This resulted in central banks investigating the introduction of their own digital currencies, also known as “Central Bank Digital Currencies”.

What are CBDC’s?

In its simplest form, a CBDC is a 

 

“digital representation of a sovereign currency issued by and as a liability of a jurisdiction’s central bank or other monetary authority” [2]. 

 

According to the Bank of England [3], CBDC’s are electronic Central Bank (CB) money that:

(i) can be accessed more broadly than reserves;

(ii) potentially have greater functionality for transactions than cash (such as improved efficiency on payment systems and cross border payments);

(iii) have a separate operational structure to other forms of Central Bank money, allowing it to potentially serve a different core purpose, and;

(iv) can be interest bearing, under realistic assumptions paying a rate that would be different to the rate on reserves. 

Other characteristics that can sweeten the deal for CB are that CBDC’s can compete with private e-money and help transition to a cashless society, while diminishing cyberattacks and counterfeiting. 

A 66 participant Bank for International Settlements (BIS) survey demonstrated increasing engagement of central banks in CBDC work. By 2019, about 4 out of 5 respondents had CBDC’s in their project folders, compared to 65% two years earlier. Nonetheless, it would seem that a small percentage of those interested are actually in a development/pilot phase, with the majority still doing experiments and proof-of-concept [4]. 

Retail and wholesale are the two main types of currencies that capture the spotlight. While retail CBDC’s aim to give access to every consumer out there (much alike cash, but with the subtle restriction of needing a mobile device and internet access), wholesale CBDC’s are restricted-access digital tokens for wholesale settlements (eg. interbank payments, or securities settlement). So far, retail and hybrid models are taking the lead over wholesale models [ibid]. 

Countries leading the cause of CBDC’s

Depending on their state, we can categorize CBDC projects in the following categories:

1. Cancelled (10)
2. Research (35)
3. Pilot (10)
4. Development (17)
5. Launched (4)

While over 55 countries currently have plans to launch their own digital currency and many have been conducting extensive research on the subject, only a handful are actually in an advanced state to launch it in the short-medium term (we consider those currently on a pilot program or further). Among them we can find China, Sweden, the European Caribbean Currency Union, and the Bahamas [5]. 

Fearing a wide acceptance of Facebook’s Libra, we can find China as team leader. With a prototype that is only now being tested by private and public hands, but that has been cooking since 2014, this world power wants to position itself as owning the first definitive strong CBDC before its 2022 Winter Olympics. Unlike its european counterpart, China has been seeing steady decreases in cash payments, which amounted to a bare 20% in 2018. 

As one of the countries with the lowest cash-usage in the world, Sweden has recently transitioned from the 2020 e-krona pilot to a complete digital currency review that aims to finish by the end of November 2022. Even though it is taking cautious steps and aiming to get every aspect right, those steps are bigger than many other countries have taken [6][7]. 

The Eastern Caribbean Currency Union is the third in the list of most advanced CBDC projects. Its central bank, ECCB, has been testing the retail Caribbean Dollar (DXCB) pilot program since March 2020. With current cash payments amounting to over 80% and traditional digital payments being costly, the issuance of a CBDC can prove a game-changer.

A place with geographic barriers of payments and money distribution, the Bahamas have around 380,000 people living scattered on the 700 islands, and initiated their own CBDC project called the “Sand Dollar.” Although counting on a stable –pegged-  currency and high levels of bancarization, there are still many groups in the area that are excluded from banking services. With its launch in October 2020, the Sand Dollar made the Bahamas the first country in the world to officially roll out a CBDC.

Graph 1: CBDC project status around the world. December 2020. [8]

Some curious cases

Typically, the U.S. leads the vanguard of research and development of most technological advances, but the case of CBDC’s appears to be the exception to the rule. While effectively dedicating plenty of resources on the research of blockchain technology and its application for a U.S. CBDC, most high-ranked officials have told that they do not intend to lead in this race. Case in point, the current strategy involves carefully analyzing the effects that CBDC have on foreign economies, and adjust plans, if needed, for the development of the domestic one [9]. 

Similarly, the U.K. and Russia should be “further along than they are, but are not” [10]. In the case of the U.K., it can be because they assign too much focus on researching rather than “going forward.” Russia, on the other hand, sympathizes with the U.S. and doesn’t have the objective of being first in the race. Despite having banned cryptocurrencies in the country, the Russian central bank has recently set up to create a digital ruble to replace unreliable payment mechanisms, as well as to create new layers for money transferring, (tax) payments, conversion to foreign currencies and store of value [11][12]. 

Conclusion

Despite still being in its infancy, the development of CBDC’s is likely to see exponential growth in 2021. As the countries leading the cause of CBDC’s will test the technology and use of the digital currency in their own markets, adoption is likely to increase and gain the attention of other countries. To keep up to date with developments happening in the blockchain industry, subscribe to receive news and engaging articles on the topic. 

Need to build your own digital currency? Scalable Labs can help. 

 

 

 

References

[1] Kriwoluzky, Alexander, and Chi Hyun KIM. “Public or Private? The Future of Money.” European Parliament, Dec. 2019. 

[2] Kiff, J., Alwazir, J., Davidovic, S., Farias, A., Khan, A., Khiaonarong, T., … & Zhou, P. (2020). A survey of research on retail central bank digital currency. Available at SSRN 3639760.

[3] Ward, O., & Rochemont, S. (2019). Understanding Central Bank Digital Currencies (CBDC). Institute and Faculty of Actuaries (March 2019).

[4] Wong, P., & Maniff, J. (2020). Comparing Means of Payment: What Role for a Central Bank Digital Currency?. FEDS Notes, 08-13.

[5] Gross, Jonas. “CBDC Pioneers: Which Countries Are Currently Testing a Retail Central Bank Digital Currency?” Medium, 20 June 2020, jonasgross.medium.com/cbdc-pioneers-which-countries-are-currently-testing-a-retail-central-bank-digital-currency-49333be477f4. 

[6] Partz, Helen. “Sweden’s Central Bank to Partner with Accenture to Launch E-Krona.” Cointelegraph, 13 Dec. 2019, cointelegraph.com/news/swedens-central-bank-to-partner-with-accenture-to-launch-e-krona. 

[7] Partz, Helen. “Sweden Is Studying a Potential Transition to the e-Krona CBDC.” Cointelegraph, 11 Dec. 2020, cointelegraph.com/news/sweden-is-studying-a-potential-transition-to-the-e-krona-cbdc. 

[8] For a continuously updated platform on CBDC advancements, please visit:

Gross, Jonas, et al. “Central Bank Digital Currency (CBDC) Tracker.” CBDC Tracker, BCG, Digital Euro Association, R3, Firmshift, 22 Jan. 2021, cbdctracker.org/. 

[9] Fed’s Powell: More Important for U.S. to Get Digital Currency Right than Be First. Thomson Reuters, 19 Oct. 2020, www.reuters.com/article/us-usa-fed-powell-digitalcurrency/feds-powell-more-important-for-us-to-get-digital-currency-right-than-be-first-idUSKBN2741OI.

 [10] Hinchliffe, Ruby. “UK CBDC Researcher: We Should Be Further along than We Are.” FinTech Futures, 15 Dec. 2020, www.fintechfutures.com/2020/12/uk-cbdc-researcher-we-should-be-further-along-than-we-are/. 

[11] Wood, Miranda. “Russia to Confiscate Crypto, Central Bank against Private Digital Currency.” Ledger Insights , 8 Nov. 2019, www.ledgerinsights.com/russia-confiscate-crypto-private-digital-currency/. 

[12] Kozlov, Vladimir. “Russia’s Regulator to Create a New Digital Currency.” Bne IntelliNews, 21 Oct. 2020, www.intellinews.com/index.php/russia-s-regulator-to-create-a-new-digital-currency-194385/?source=russia. 

Sources

Boar, C., Holden, H., & Wadsworth, A. (2020). Impending arrival–a sequel to the survey on central bank digital currency. BIS Paper, (107).

Auer, R., Cornelli, G., & Frost, J. (2020). Rise of the central bank digital currencies: drivers, approaches and technologies. Bank for International Settlements, (880), 36.

White label exchange software provider Scalable Solutions has integrated Sumsub, an all-inclusive KYC/AML compliance platform. 

As regulation around digital asset management and services is becoming clearer and more demanding, compliance is top of mind for exchanges, institutions and other financial services providers. Having access to a one-stop-shop for all compliance needs can significantly lower the costs usually associated with KYC/AML compliance procedures, such as technology integration and operations, human resources and maintenance costs. 

Sumsub tackles all onboarding and compliance challenges that come with identity verification. It optimizes KYC and AML procedures by converting existing policies into automated digital processes that allow faster and safer customer onboarding. 

Scalable Solutions and Sumsub have partnered to further offer clarity and ease of compliance integration to their clients, which range from exchanges, brokerages, wallet providers, institutional players, fintech companies and more. Hence, the integration is able to:

• Drive conversion of customers – identity verification becomes a smooth process and no longer a bottleneck in the onboarding procedure. This eliminates user frustration and saves time for financial services providers, creating an overall better customer experience. 
• Optimize costs – having to coordinate verification with multiple providers is not only time consuming and costly, but also oftentimes inefficient. Sumsub’s user-friendly interface allows transparent checks, improved workflows and customizability, all from one monitor and source. 
• Champion compliance and prevent fraud – compliance with local and international legal frameworks and regulations (think FATF, FINMA, FCA, CySEC, MAS) is integrated. Fraud recognition services and extensive legal expertise prevent the risk of unlawful activity taking place. 

Before the partnership, Scalable Solutions and Sumsub already had quite a few mutual clients, such as Bitcoin.com and Changelly, which further convinced the two companies to collaborate.

Mark Berger, founder of Scalable Solutions, added: 

“As a company that values security and knows its importance for our clients, we’re glad to have integrated with Sumsub to provide KYC and AML compliance services that are transparent, easy to navigate and a pleasure to work with.” 

Jacob Sever, Co-founder of Sumsub, said:

“If trading businesses want to avoid fines and keep their platforms out of trouble, compliance with regulatory demands is vital. We’re happy to supply Scalable Solutions with a secure and user-friendly tool. Now their clients can stop worrying about complicated regulations and onboard more efficiently.”

 

 

 

About Sumsub 

Sumsub is an identity verification platform that provides an all-in-one technical and legal toolkit to cover KYC/KYB/AML needs. The company focuses on accelerated ID verification, digital fraud detection, and compliance in over 200 international markets. Sumsub combines top technologies with legal expertise and assistance with financial requirements (FCA, CySEC, MAS, FINMA, BAFIN, etc). Clients include BlaBlaCar, Gett, ESL Gaming, JobToday, Wheely, Bitcoin.com, Changelly, Decta, Exness, HRS Group.

Awards: Benzinga Global Fintech Awards 2018, The UK Startups 100 2020, PwC nomination for ‘The best use of tech award’.

Sumsub Contacts

Olya Laktyushina 

olya.l@sumsub.com

About Scalable Solutions

Scalable Solutions is a global technology and service company that focuses on developing state-of-art white-label blockchain solutions for our clients. The institutional-grade trading software which serves as a B2B solution for exchanges and brokers has never been compromised. Besides innovative technology, the security of exchange systems is a significant area of value and pain-point the company is solving for its clients. 

Contact us at sales@scalablesolutions.io

The blockchain industry and crypto assets in particular have garnered increasing levels of attention from traditional institutions, especially since 2020 has seen the rise of new digital currencies and an all time high surpassing US$ 40,000 for Bitcoin in early January, 2021. Nevertheless, not all circles have shown fondness for the digital assets in question [1]. In spite of the fact that the top ten companies that hold Bitcoin amount to 4% of total supply (not considering lost coins), it seems that even nowadays companies maintain a certain level of skepticism about digital assets [2][3]. One obvious reason behind this resides in the fact that there is no worldwide adoption of regulation and legislation regarding cryptocurrencies [4][5][6]. 

Given this opportunity, we would like to present a -not so obvious- discussion: 

 

What happens once every major regulatory obstacle has been overcome? Can institutions just open an account and start accumulating digital assets?

 

Well, the reality is that there is much more than meets the eye. Even though it is estimated that 36% of institutional investors (in the US and Europe) are currently invested in digital assets, the process is not an overnight occurrence. Large financial institutions like pension funds are (at least in the US) public entities, so they are “mired with red tape, resulting in them more often than not being ‘late to the game’ in the realm of the investment opportunities” [7][8]. Companies, whether public or private, also face a series of obstacles before achieving the possibility of entering the cryptocurrency market.

The obstacles for companies accumulating digital assets

Let’s review some of the major factors preventing companies in accumulating digital assets:

• Statute/Bylaws. Usually, the relationship between size and steering capabilities is an inverse one for companies. As they get bigger in size, internal statute or bylaws prevent them from taking hard course deviations from the long term plan. In the digital asset case, this sets a first obstacle for entering the market.
• Stakeholders. In cases where the decision is subject to a vote, major stakeholders of a company have a say. As a first stage, management clarifies its stand, and later shareholder’s values are considered through the respective boards. The process of obtaining management and board approval can take months, and even years, given that not only CEO’s must intervene, but every major Committee (Risk, Audit, Compliance, etc.). After this time, the ship may have already sailed.
• Regulation. This obstacle is highly discussed and merits an article on its own, but we’ll do a quick review. As we can appreciate from aggregated sources on worldwide cryptocurrency regulation, there is no unique position and treatment of digital assets. Historically, the European Union has proved to be friendlier to this asset class, and states in the US have taken independent stances. For the benefit of the industry, this approach is currently changing and the Conference of State Bank Supervisors (CSBS) is establishing a uniform evaluation [3]. Regardless, there is a long way before governments and regulatory authorities reach something resembling a consensus on how to treat digital assets.
• Institution type. Whether the institution intending to participate in the digital asset industry is a bank, hedge fund, pension fund, or a small private enterprise, it can make a big difference on the obstacles it has to face. Protecting investors is usually the purpose behind financial institutions’ regulation, so it’s only natural for them to endure higher scrutiny.
• Practical inconvenience. Digital asset volatility impacts the processes involved in registration and reporting. Balance sheet currency conversion as well as income statement unrealized gains/losses on currency translation can be costly, and must be considered to be deemed appropriate given the amount of the investment. Similarly, capital gains, tax credits, and others have to be reported in the company accounts depending on jurisdiction treatment of each asset class.
• Opportunity cost. Lastly, it can be argued that there is an opportunity cost on assigning funds to digital assets instead of finding productive projects within the company. This argument doesn’t remain inalterable when confronted with the last 10-year return for every major digital asset, surpassing the most profitable public companies. Moreover, this is not a trade-off specific to digital assets, but a common problem within all asset classes.

A famous case

The case of Microstrategy Inc. – the biggest business intelligence (BI) application software vendor – has become one of the most famous in the sphere. The company, currently valued at US$ 3 billion, has an accumulated value in Bitcoin of over US$ 700 million, more than 23% of its total market capitalization at the time of the writing. In a press release, they commented that they found the …

“(…) global acceptance, brand recognition, ecosystem vitality, network dominance, architectural resilience, technical utility, and community ethos of Bitcoin to be persuasive evidence of its superiority as an asset class for those seeking a long-term store of value. Bitcoin is digital gold (…), we expect its value to accrete with advances in technology, expanding adoption, and the network effect that has fueled the rise of so many category killers in the modern era.”

Start moving

It is imperative to start getting these obstacles out of the way, even if ultimately the company’s decision ends up being not to adopt digital assets. In the previous case, Microstrategy had earned US$ 78.5 million from business operations for the past 3.5 years alone, while (unrealized) gaining US$ +100 million in the past 3 months from Bitcoin purchases [9]. 

In the meantime

If your company is currently dealing with any of the above challenges, or even others not contemplated, there are ways to get involved with digital assets without actually buying them directly. A relatively new alternative is investing in publicly traded companies that own digital assets. Yahoo, for example, keeps a watchlist on these companies along with actual and estimated returns [10]. Having a trusted partner with first-hand experience in the regulatory digital asset system can make it simpler to navigate this realm and introduce institutional clients to new investment opportunities. Get in touch with our team to get started. 

 

 

 

References

[1] In this and other articles, we will use the terms ‘digital assets’ and ‘cryptocurrencies’ interchangeably. 

[2] The top ten companies that hold 830400 BTC are: Grayscale Bitcoin Trust, Block.one, CoinShares, MicroStrategy, The Tezos Foundation, Galaxy Digital Holdings, Stone Ridge, 3iQ The Bitcoin Fund, ETC Group Bitcoin ETP and Square Inc;

[3] “Bitcoin Treasuries.” Bitcoin Treasuries in Publicly Traded and Private Companies – List of Large Holders, 2020, bitcointreasuries.org/. 

[4] “Cryptocurrency Regulations Around the World.” ComplyAdvantage, 15 May 2020, complyadvantage.com/blog/cryptocurrency-regulations-around-world/;

[5] “State Regulators Roll Out One Company, One Exam for Nationwide Payments Firms.” Csbs.org, Conference of State Bank Supervisors, 15 Sept. 2020, www.csbs.org/regulators-announce-one-company-one-exam-for-payments-companies. 

[6] Baltrusaitis, Justinas. “Top 10 Companies Hold $15 Billion in Bitcoin, 4% of Total BTC Supply.” Bankr, 30 Nov. 2020, bankr.nl/top-10-companies-hold-15-billion-in-bitcoin-4-of-total-btc-supply/. 

[7] Adesina, Olumide. “About 33% of Pension Funds, Hedge Funds Now Own Digital Assets Such as Bitcoin.” Nairametrics, 9 June 2020, nairametrics.com/2020/06/09/about-33-of-pension-funds-hedge-funds-now-own-digital-assets-such-as-bitcoin/. 

[8] Bhutoria, Ria. “The Institutional Investors Digital Asset Survey.” Fidelity Digital Assets, June 2020. 

[9] Helms, Kevin. “Microstrategy CEO Personally Owns $240 Million in Bitcoin – Company’s BTC Profit Eclipses Other Earnings: News Bitcoin News.” Bitcoin News, 29 Oct. 2020, news.bitcoin.com/microstrategy-ceo-million-bitcoin-btc-profit/. 

[10] “Top Crypto Bets.” Yahoo! Finance, Yahoo!, Dec. 2020, finance.yahoo.com/u/yahoo-finance/watchlists/top-crypto-bets/?guccounter=1.

Asset tokenization

Asset tokenization has been breaking the ground before its feet with every step it takes. A blockchain application technology (DApp) once thought of as there mainly to improve current processes and provide value in an already crowded space (traditional finance), has displayed its potential and countless uses once again. Despite being initially marketed to tokenize illiquid assets like real estate, art, and others, it has evolved to include almost every conceivable asset. This article explores tokenization in the sports industry and its potential benefits. 

Although we have already introduced the concept of asset tokenization [1], we’ll do a quick review in order to keep this article friendly for every reader.

Tokenization is the “bridge between real-world assets and their trading, storage and transfer in a digital world.” It is the digital representation of a specific right over a real-world asset.  There are many types of tokens that can be sorted into non-exclusive categories, including security, platform, transactional, utility, and governance tokens. When discussing security tokens, we should keep in mind the subtle distinction between security tokens and tokenized securities, with the main difference being whether they’re natively issued on a blockchain or not. On this occasion we will refer to tokenized securities; blockchain-embedded representation of a real world security. This category includes every asset that exists outside of the blockchain and that is subsequently tokenized.

Application: Tokenization in the sports industry

Apart from the asset categories used to describe tokenization (see above), the sports industry is a not-so-obvious one that has been leveraging its benefits. The sports industry has historically moved millions of people worldwide, and has grown in most of its metrics for the past decade [2], but as new situations arise (pandemic, change in the average age and habits of consumers, among others), new challenges and threats must be overcome in order to continue its success. 

Its ecosystem is not a simple one, characterized by various flows among many participants. Among these are the loyal fanbase, clubs, players, sponsors, leagues, brands, media.  

 

The sports ecosystem: the flow of money [3]

It is also potentially a sizable market. In 2018, the global sports market was valued at approximately US$ 471 billion. In contrast, the market was valued at 324 billion U.S. dollars in 2011, showing a CAGR of 5.49% for the last ten years. The United States held a 32.5 percent share of the global sports market in 2018 [4]. 

Windows opening for the ball

Some interesting tokenization plays in sports include the utilization of tokens and smart contracts in these next categories [5]:

• Fan experience

1. 1. Fan engagement: Tokens could be used for discounts, presale rights, voting rights, network participation (polls for example), invitations to specific stadium areas, meeting with players, loyalty programs, etc.
   2. Tokenized governance solutions: For acting on social issues that matter for token holders like racism, environmental issues, LGBQT rights, treatment of female fans in stadiums, and others [6]. 

• Processes – Administrative – Financials:

1. 1. Performance and transfer record: Developing tracking systems for players, getting reliable monitoring, storing data on payments, performance and/or injuries. Also, useful for tokenized salary payments as well as incentive-based compensation. This carries an implicit benefit for tax, audit, and compliance.
   2. Medical data record: Immutable data records on health issues and interventions. 
   3. Player tokenization: Though currently applied on solidarity mechanisms, down the line it’s possible for the entire player contract, marketing and partnership agreements to be tokenized. It can also be used to exploit currently untapped non-professional lines like college sports by helping in supporting young athletes. Players information can be stored in blockchain’s immutable ledger since early stages, through the use of wearables.
   4. Tokenized crowdfunding: Security Token Offerings for raising funds when the traditional system (financial institutions) is not enough.
   5. In stadium payment systems: These can be used for concessions and merchandise payments. By gathering data, it can also help clubs to get a better understanding of their fan base.
   6. Tokenized personal seat licenses that could enable season ticket holders to rent out their seat for separate matches in a safe manner in terms of tracking individual attendance and payment.
   7. Tokenized revenue distribution schemes: In order to facilitate the flows within sports organizations (see chart above), automated and transparent revenue distribution schemes can be based on tokenization. Revenues could be automatically distributed between league, clubs, and potentially athletes, using data from various sources to account for each entity’s contributions, based on transparent stakeholder governance.

• Commerce

1. 1. Digital collectibles: Powered by Non-Fungible Tokens (NFT), digital collectibles are usually “individually unique and limited in quantity,” and can have these characteristics verified by the immutability of the blockchain they are based upon.
   2. Ticketing w/ tokens: For events with high demand, high resale potential, and control over who gets access to re-sell your tickets (over 2yr market).  Blockchain registration of ticket purchases ahead of games or season takes would allow fans to exchange their tickets on a token-to-token basis, avoiding the secondary market of selling tickets or even purchasing fake tickets [7].  

Current state of tokenization in sports

People in the sports business are starting to understand the benefits that tokenization can provide to their organizations and business models. European football clubs in different leagues such as Barcelona, Juventus, Manchester United, and others are adopting tokenization schemes for specific purposes (see tokenization plays). Some South American clubs took a first incursion as well [8].

 

Tokenization of sports with SCALABLE 

At SCALABLE we believe that blockchain technology has the potential to change every major aspect of how we interact with each other. With tokenization as one of its pillars, the revolution gains traction and sets to promote advances for improving our society. The main (or only) question is what we can do to support it. Remaining on the sidelines can only result in being left-out in the long term. Coming back to the sports analogy, we can ask ourselves, ‘How come we (the participants) can not be subject to adopting new technologies, when the sport itself is (smart ball system, hawkeye, goal ref, VAR)?” 

Global sports industries are poised to be disrupted by an influx of capital resulting from the tokenization of practically every facet of the industry. For investors, this represents an opportunity to invest in players with significant upside earnings potential and influence, gaining exposure to an industry set to develop at a rapid pace. Get involved in the tokenization of sports by contacting Scalable here. 

 

 

 

References

[1] “DeFi Apps: Asset Tokenization .” Resources, Scalable Solutions, 28 Oct. 2020, scalablesolutions.io/news/defi-apps-asset-tokenization/. 

[2] “Business Wire’s Website Is Currently Unavailable.” Business Wire, 14 May 2019, www.businesswire.com/news/home/20190514005472/en/Sports—614-Billion-Global-Market-Opportunities. 

[3] @kearney. (2018, March 4). “Are you a #Sports fan? In the race for eyeball attraction and premium #content, Sports is a grail to #media and new #digital players : one should expect more money to fuel the sports ecosystem. Read more: http://bit.ly/2EXfS3S” [Tweet]. https://twitter.com/kearney/status/970245010342936577?lang=es

[4] “Sports Market Size Worldwide 2018.” Statista, July 2019, www.statista.com/statistics/1087391/global-sports-market-size/. 

[5] Euler, Thomas. “The Tokenization Playbook for the Sports Industry.” Medium, Liquiditeam, 4 June 2020, medium.com/liquiditeam/the-tokenization-playbook-for-the-sports-industry-guide-blockchain-busines-87da13d33dfe. 

[6] Law, Joshua. “How Bahia Became the Most Progressive Football Club in Brazil.” The Guardian, Guardian News and Media, 13 Nov. 2019, www.theguardian.com/football/2019/nov/13/bahia-progressive-football-club-brazil-prices-fans-political-issues-love. 

[7] “Blockchain for Ticketing: A Complete Guide.” Event Manager Blog, EventMB, 29 Oct. 2020, www.eventmanagerblog.com/blockchain-ticketing. 

[8] Gregorio, Rafael. “Vasco Da Gama e Mercado Bitcoin Lançam Token Para Investir Em Direitos De Jogadores.” Valor Investe, 5 Nov. 2020, valorinveste.globo.com/mercados/cripto/noticia/2020/11/05/vasco-da-gama-e-mercado-bitcoin-lancam-token-para-investir-em-direitos-de-jogadores.ghtml. 

Sources

Ashworth, Will. “How the Tokenization May Level the Sports Playing Field.” Nasdaq, InvestorPlace, 17 Aug. 2020, www.nasdaq.com/articles/how-the-tokenization-may-level-the-sports-playing-field-2020-08-17. 

Gwi. “Sports Around the World, Consumer Viewing Behavior on TV & Online.” GlobalWebIndex, 2020, www.globalwebindex.com/reports/sports-around-the-world. 

“Top 5 Blockchain Use Cases in Sports and Esports.” Protokol, 28 Oct. 2020, www.protokol.com/insights/top-5-blockchain-use-cases-in-sports-and-esports/. 

“Understanding Sports Tokenization from Player’s Contracts, Team Ownership & Arena Revenues.” STO Search & Filter, 10 Mar. 2020, www.stofilter.com/understanding-sports-tokenization-from-players-contracts-team-ownership-arena-revenues/. 

“World Football 2018.” Nielsen Sports, 2019, nielsensports.com/reports/world-football-2018/. 

Independently of whether they are bonds, stocks, cryptocurrencies or any other asset class, the need for various functionalities comes with the advent of every new tradable asset. Supplying the market with what we consider are necessities for efficient (strong) markets is paramount for long lasting assets and successful exchanges. Following our introduction on exchange functionalities [1] and offerings like margin trading [2] in the digital assets space, we will now dive into similar services: options and futures. 

Brief description of options and futures 

Even though options and futures contracts are both different types of derivatives, they don’t share many more similarities besides that. The key difference lies in the rights and obligations of the contract holders. While futures obligate each party to buy or sell, options give the holder a right (not an obligation). In futures trading, the buyer agrees to buy an asset at a specified price at a specified date [3]. In an options agreement, there is a writer, the person who is selling the right, and a holder, the person buying the right. The holder is buying the right to buy or sell an asset at a specified price, on or before a specified date. The holder has no obligation to exercise this contract, but the writer has an obligation to the holder. Naturally, the exercise of the option will depend on the exercise price and current underlying price. It is said to be “in the money” if the underlying price is higher than the exercise price for call options and viceversa for put options.

The most common types of derivatives include futures, forwards and options, which are based on a variety of assets, including stocks, currencies, bonds and commodities [4]. Given the sheer number of derivatives available today, the market’s size is difficult to ascertain. Statista has compiled a 9 year summary, starting with 12.13 billion futures contracts and 9.42 billion options contracts in 2013 to over 19.24 and 15.23 billion respectively, with a notional value amounting to over US$ 495 trillion in OTC deals by June 2020 alone. [5][6]

History, types and actors

Originally, futures markets were established to reduce risk and manage cash flows among commodity companies. Getting commitments for their produce ahead of time at a pre-arranged price provided a layer of safety to an already volatile industry. Farm output, for example, can take time in preparation and can incur many risks such as production risk (weather and climate), market, institutional, personal and financial risk [7]. Therefore, it makes sense for commodity companies to want to avoid market price fluctuations and uncertainties in the future. (One could make a similar initial case for cryptocurrency miners, trying to secure a base price on their efforts). While traditional markets have been using various forms of derivatives for a long time, their modern varieties can be traced back to the 1970s and 1980s, when the Chicago Mercantile Exchange and Chicago Board of Trade introduced futures contracts [8].  

Exchanges with a derivatives platform that have the option of entering into futures, contracts and/or options are more likely to mainly attract experienced traders looking for various ways of playing the market and hedging positions. 

Benefits and disadvantages to cryptocurrency options and futures contracts

• Tailored exposure. Futures allow investors to gain exposure without having to hold the underlying cryptocurrency. Futures allow investors to speculate on the future price of an asset. 
• Custody. Because holding future contracts doesn’t mean holding the underlying cryptocurrency, custody efforts are not a necessity.
• Leveraged positions. Similarly to margin trading, futures and options provide the possibility of leveraging positions and thus magnifying gains (and losses), with lower restraints from available funds. Margin calls are still applicable for futures, but not so for options trading.
• Liquidity. There are many futures markets that are liquid, at times even more than their underlying equivalent selves. For instance, the futures market in U.S. Treasury bonds is regarded as being much more liquid than its cash market. In some cases, the futures market becomes the industry benchmark. For example, commodities like gold, crude oil and cotton futures prices form the basis for pricing other related products in the industry. On the other hand, some futures markets are thin, meaning not very liquid. In the case of digital assets, futures markets are several times bigger than their spot counterparts.
• Volatility. Although some knowledgeable individuals may assume an inverse relationship between cryptocurrency futures trading and volatility (as futures trading commences, digital asset volatility decreases), the truth is that there is no academic consensus in this regard [9][10]. 
• Price discovery. Some results drawn on the intraday prices show that futures are leading the price discovery at different frequencies even with comparably low trading volumes. [11][12]

Note on valuation: Usually, the valuation process for options is far from being a straightforward one. Several inputs are part of the basic valuation model (Black-Scholes-Merton for European options, for example) to determine its fair price, including underlying volatility, underlying price, strike price of option, risk free rate and the time to expiration. In options contracts, the option right is sold and collected as a premium over the total notional value. In contrast, futures contracts don’t require early premium paid, even though its valuation takes into account a risk-premium when arbitrage approaches are used.

All-in-one SCALABLE

Added exchange functionalities like margin trading and futures and options should not be underestimated only because they can be perceived as “common.” Having robust technology to support the frequent bigger-than-spot markets is of the utmost importance for both exchanges and users, and we take pride in counting with the best out there. Get in touch to find out more about our white label exchange functionalities. 

 

 

References

[1] “Digital Asset Exchange: Main Functionalities.” Resources, Scalable Solutions, 7 Dec. 2020, scalablesolutions.io/news/digital-asset-exchange-main-functionalities/. 

[2] “Margin Trading and Why Do We Need It.” Resources, Scalable Solutions, 14 Jan. 2021, http://scalablesolutions.io/news/margin-trading-and-why-do-we-need-it/. 

[3] Nowadays, “perpetual” futures have come to existence. These vehicles are now the most traded ones, having a volume traded up to 7 times of its closest fixed date counterpart. They have no expiry date, and usually have higher (funding) costs.

[4] The most actively traded futures contracts are stock index futures. They carry liquidity, leverage and tax advantages over trading index ETFs. These are highly active because of how much money is managed in the stock market. Portfolio managers routinely use futures to hedge their exposure.

[5] “Global Futures and Options Volume 2013-2019.” Statista, Statista Research Department, 23 Nov. 2020, www.statista.com/statistics/377025/global-futures-and-options-volume/. 

[6] “OTC Derivatives Statistics at End-June 2020.” The Bank for International Settlements, 9 Nov. 2020, www.bis.org/publ/otc_hy2011.htm#:~:text=The%20increase%20primarily%20reflected%20interest,attributable%20to%20a%20seasonal%20pattern.&text=The%20notional%20amounts%20of%20other,flat%20over%20the%20same%20period. 

[7] Komarek, A. M., De Pinto, A., & Smith, V. H. (2020). A review of types of risks in agriculture: What we know and what we need to know. Agricultural Systems, 178, 102738.

[8] “Futures Exchange.” Wikipedia, Wikimedia Foundation, 13 Dec. 2020, en.wikipedia.org/wiki/Futures_exchange#History. 

[9] Corbet, S., Lucey, B., Peat, M., & Vigne, S. (2018). Bitcoin Futures—What use are they?. Economics Letters, 172, 23-27.

[10] Kim, W., Lee, J., & Kang, K. (2020). The effects of the introduction of Bitcoin futures on the volatility of Bitcoin returns. Finance Research Letters, 33, 101204.

[11] Fassas, A. P., Papadamou, S., & Koulis, A. (2020). Price discovery in bitcoin futures. Research in International Business and Finance, 52, 101116.

[12] Kapar, B., & Olmo, J. (2019). An analysis of price discovery between Bitcoin futures and spot markets. Economics Letters, 174, 62-64.

Sources

Hale, G., Krishnamurthy, A., Kudlyak, M., & Shultz, P. (2018). How futures trading changed bitcoin prices. FRBSF Economic Letter, 12, 1-5.