Kraken unlocks crypto collateral for derivatives across the EU

Crypto exchange Kraken will now allow traders to post cryptocurrencies as collateral using its MiFID-regulated derivatives platform in the European Union, Director of Derivatives at Kraken Alexia Theodorou told The Block.

The move helps round out the exchange's offerings in the EU, having launched derivatives trading across the trading block in May. It may also help secure Kraken's position as "biggest European perpetual offering," according to Theodorou.

"When we launched with MiFID under Europe, we did not have MiCA or a regulated European crypto custodian live," Theodorou said in a call, referring to the comprehensive Markets in Crypto-Assets regulations in the EU. "At that point in time, it was agreed with the regulator that we cannot offer crypto collateral to the European clients under a European regime."

Kraken's launch on Monday speaks to the evolving nature of crypto regulation at both a global and local level. The exchange has long offered crypto collateral optionality in most localities around the world, though some emergent products — like crypto-native perps — raise particular concerns to different regulators.

"We spend a lot of time with the regulators, especially our regulator, which is CySEC, but also at the ESMA [European Securities and Markets Authority] level as well, to ensure that they're comfortable on the classification of what is a perpetual future, educate them, make sure they understand that this is an exchange-traded product," Theodorou said.

As part of Kraken's strategy to bring perps across Europe, the exchange acquired a MiCA license from the Central Bank of Ireland, a Markets in Financial Instruments Directive-regulated (MiFID) entity in Cyprus, and Multilateral Trading Facility (MTF) approval from the UK's Financial Conduct Authority.

Kraken is using its Irish entity to custody client collateral while tapping its UK venue to bring "global liquidity to the European clients," even though the UK has exited the common EU market. 

"The fact that we have a UK-regulated MTF and a MiFID entity means we didn't have to split our international liquidity and European liquidity," Theodorou said. "It's all hosted under our UK MTF, which is what makes us unique and the biggest European perpetual offering."

At a practical level, this means European traders can now post crypto collateral without leaving the guardrails of a MiFID-regulated framework, arguably reducing risk. Theodorou notes that "depending on the volatility of the crypto collateral, there's a different type of haircut applied to reflect that risk."

Theodorou added that Kraken is one of the few exchanges to margin crypto collateral "back to the dollar," meaning it automatically converts the value of crypto assets into USD for all margin and liquidations calculations.

Despite the inherent risk of posting crypto over fiat collateral, Theodorou said the exchange has received countless requests from institutional clients — predominantly crypto natives — for the option. And the fact that it's offered under a European regulatory regime may help unlock "even more flows and balances into our order book," she added.