Digital asset trading group Genesis has started accepting non-fungible tokens as collateral for loans and derivatives deals, in a sign that digital art has found its way into the booming market for complex crypto financial products.
Genesis is tapping into one of the hottest corners of the digital finance industry by building financial products backed by NFTs, a type of digital collectible that can be traded on blockchains.
“NFTs come up in almost every conversation,” Joshua Lim, head of derivatives trading at Genesis, said in an interview with the Financial Times.
The market for NFTs swelled to $40bn last year, and the enthusiasm surrounding them has persisted in 2022. Sport-themed digital collectibles are estimated to reach $2bn in value this year, after the broader sphere of collectible digital art first hit the 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 underpin a financial deal. However, NFT prices can be highly volatile, adding a further level of risk to the products Genesis has introduced.
Lim said the company, which is part of Barry Silbert’s Digital Currency Group, takes a “very conservative approach” to valuing NFTs as a backstop for loans or trades and using them as security against loans or trades. He said Genesis only takes “blue-chip” NFTs that have some historical significance or a lively market for secondary trading.
Genesis is the biggest trading desk for professional investors in cryptocurrency markets. In the past three months of 2021, the company underwrote $50bn of loans, pushing the year’s total to $131bn. The trading desk handled $170bn worth of cash and derivatives deals last year.
Derivatives markets in digital assets grew eightfold between June 2019 and June 2021, when a total of $3.2tn of structured products changed hands on trading venues, according to data from CryptoCompare.
Derivatives markets accounted for slightly more than half of the total of cryptocurrencies traded, meaning that volumes exceeded those in cash markets, CryptoCompare calculated.
The growth of derivatives markets has been fuelled partly by the entry of professional participants including banks, as regulatory restrictions mean that such institutions are unable to trade in cash crypto markets. This has bolstered volumes of Chicago Mercantile Exchange-listed futures contracts and, more recently, trading in “over-the-counter” crypto derivatives that trade outside of exchanges.
In a sign of the growing reach of financial products built on digital assets, the International Swaps and Derivatives Association, the standard-setting body for derivatives, announced earlier this month that it would develop a framework for digital assets.
NFTs are one of the fastest-expanding segments of the digital asset realm, according to a report from 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 capitalise on the boom despite scrutiny due to incidences of fraud and price manipulation as well as hacks and counterfeits.