Year in Review: The Importance of Trust

Written by: Rob Strebel, Head of Relationship Management at DRW

In Satoshi’s original white paper, the word “Trust” appeared 13 times in just eight pages. Trust, or more accurately, the ability to do without Trust, has been the guiding inspiration for DLT builders and developers since the dawn of the crypto experiment. Although building a world that does not require trusted intermediaries remains the ultimate goal for crypto-maximalists, reality dictates that a hybrid form of this vision is still required in order to attract broader adoption of the technology.

If we’ve learned one lesson in 2022, it’s that trust can be destroyed in an instant. That is why, at Cumberland, we so ardently protect the trust we have built with our counterparties and partners in the industry. Much has been said and written about the perils of the vertical offering and as a firm, we feel our decision to focus on just one aspect of that vertical – liquidity providing – has served our counterparties well.

From LUNA to 3AC to FTX, the stresses and uncertainty in crypto remain at uncomfortable levels. The list of failed businesses continues to grow, exchanges around the world are scrambling to provide credible proof of reserves, and investors are struggling to find direction in a market braced for the next shoe to drop. In this environment, capital preservation has become the goal, and knowing who you’re dealing with and what risk that poses to your business has become the top priority.

As such, in 2023, we anticipate the ecosystem increasingly preferring to source its crypto liquidity from OTC trading firms at the expense of the exchanges. Since LUNA, we have seen a sizeable increase in onboarding requests for both spot OTC trading and bilateral options trading, demonstrating a move by counterparties from the flashy, opaque exchanges to the quieter, transparent and reliable OTC desks, such as Cumberland.

In the OTC spot market, Cumberland has never required pre-funding before trading – an offering that has appreciated greatly in value for our counterparties post-FTX. We are able to extend this level of capital efficiency and safety because we spend the time and invest the hard work in understanding who we are trading with, their business model and their capacity to manage risk. We also have benefited from having strong compliance and credit teams since our founding, who work diligently to set suitable risk parameters around counterparty exposure and idiosyncratic token risk. Our counterparties need deep, reliable, consistent liquidity, and we are thoughtful and disciplined in taking the measures necessary to deliver on that requirement throughout all market conditions.

As we’ve seen over the last year, the crypto options market has grown in leaps and bounds. Traditional HODL strategies that worked well in the past are being uprooted and disrupted by wild price gyrations and historically high levels of market uncertainty. In its place, we are seeing a marked increase in the level of sophistication and complexity applied to crypto trading strategies. Our counterparties are increasingly using bilateral options in ways deployed for decades in the FX and equity markets: selling covered calls and puts for yield enhancement purposes, buying call spreads to limit downside exposure, and trading calendar spreads to hedge event risk.

These options are governed and documented using tried and tested ISDAs, which very clearly outline each counterparty’s responsibilities and obligations. We manage the market and counterparty risk through IA and VM, and offer our counterparties full transparency. We also exchange audited financials and host regular compliance and credit calls with our counterparties to ensure we all have the information necessary to properly assess each other’s financial health. These measures allow us to proactively manage contagion risks and limit the extent of the fallout should any one of our counterparties fail.

If the tail end of 2022 is any indication, 2023 is sure to be packed with more “unknown unknowns,” soap opera worthy plot twists, and plenty of head scratchers. As much as we all strive for Satoshi’s ultimate dream of a trustless world of financial independence and inclusion, we must respect the fact that Trust remains an integral part of today’s financial system – in crypto and TradFi alike. We appreciate and value the trust you have placed in us, and we look forward to providing you with deep, reliable and consistent crypto liquidity in 2023.