Navigating Digital Assets Market Structure in the UK and Europe

Introduction

The digital assets ecosystem is seeing growing institutional participation alongside evolving regulatory frameworks in Europe and the UK. As these assets increasingly enter the mainstream, understanding their market structure is essential for institutional investors seeking exposure, risk management, and operational efficiency in this new asset class.

This primer outlines centralized digital assets markets, key differences from traditional financial systems, and the lifecycle of digital assets, from issuance and trading to custody and settlement. It also examines the implications of vertical integration, fragmented liquidity, and the absence of conventional intermediaries. Key takeaways include:

• Centralized Exchanges (CEXs): Digital asset markets differ from traditional finance, with vertically integrated platforms combining trading, custody, clearing, and settlement. Settlement is often instant and on-chain, without traditional intermediaries—though CEXs use internal ledgers for off-chain trading.
• Issuance Models: Layer 1 tokens are issued programmatically at the protocol level, whereas application layer tokens leverage automated smart contracts.
• Regulatory Evolution: Europe’s Markets in Crypto-Assets (MiCA) regulation (effective December 2024) introduces rules for issuers, exchanges, custodians, OTC desks, and brokers, aligning digital assets with traditional standards. The UK is developing its own framework, with legislation before Parliament and expected to come into force in 2027.
• Trading Venues and Liquidity: CEXs lead but are fragmented, lacking unified pricing, risk management, or circuit breakers. Institutional participants increasingly use segregated custody and mirrored collateral. OTC trading and prime brokerage are growing to meet institutional needs.
• Investment Vehicles: Futures (especially perpetual contracts) lead exchange volumes, offering leveraged exposure but with liquidation and funding risks. Options markets are also expanding, allowing volatility strategies and yield generation. Meanwhile, spot exchange-traded products (ETPs) provide mainstream access with regulatory clarity.
• Custody and Infrastructure: Models range from self-custody to regulated institutional solutions. Custodial risk persists, particularly on vertically integrated exchanges pooling assets off-chain.

Institutional Entry Points 

Institutional investors can access digital assets through a variety of sources. This includes centralized exchanges, OTC desks, prime brokers, and investment vehicles such as spot, perpetual futures, options, and ETPs—each with distinct structural and regulatory considerations. 

Regulatory oversight is expanding, with the implementation of the MiCA regulation in Europe and the UK’s draft legislation signaling increasing alignment with traditional financial markets. These frameworks introduce requirements for asset segregation, disclosure, market integrity, and custody—bringing digital asset service providers closer to the operational and compliance expectations of legacy institutions. 

While decentralized finance (DeFi) is an innovative and expanding segment of the digital asset space, it falls outside the scope of this primer. DeFi refers to financial services such as lending, borrowing, and trading through decentralized protocols built on public blockchains. Unlike centralized platforms, DeFi applications operate without intermediaries, relying instead on smart contracts to automate transactions and enforce rules. Users interact directly with these protocols via self-custodial digital wallets that they secure themselves, instead of through a third party.

The Issuance of Digital Assets

Digital asset issuance differs from traditional markets. On Layer 1 blockchains (the settlement layer of the network), it is typically hard-coded at the protocol level and occurs automatically as block rewards or issuance. 

For example, Bitcoin issues tokens as rewards to miners for securing the network, following a fixed schedule where rewards halve every four years. There is also a hard supply cap of 21 million bitcoin. 

Comparatively, Ethereum rewards validators who stake or “lock up” ether (ETH) to secure the network. Issuance is adjusted depending on the total ETH staked in the system. Ethereum also featured an initial token auction, selling tokens to the public and allocating a portion to the Ethereum Foundation.

For applications built on Layer 1 blockchains, token supply and transfer rules are defined by the issuer of the tokens and implemented via smart contract. Tokens are “minted” (created) and distributed through on-chain transactions to individual investors’ wallets or exchanges managing the distribution. Issuance models vary—tokens may be pre-minted, continuously issued, include lock-ups, or be “burned” to reduce supply.

Settlement occurs automatically, without underwriters, banks, or even custodians if investors self-custody. However, if a CEX in Europe conducts issuance or provides custody, it must meet certain compliance obligations as a regulated Crypto-Asset Provider (CASP).

Under Europe’s MiCA regulation, issuers face requirements for transparency, disclosure, authorization, supervision, and adherence to market integrity and anti-abuse rules.¹ Some issuers must obtain authorization from a national authority and publish a white paper describing the token, risks, governance, and business model. Reporting requirements mirror those of traditional assets. Single-fiat stablecoins face strict reserve, redemption, and banking license obligations.

The UK presently lacks a comprehensive framework but is making progress toward regulation. HM Treasury and the Financial Conduct Authority (FCA) are working to bring digital assets service providers into the regulatory fold, including issuers, exchanges, OTC desks, and custodians. The Financial Services and Markets Act 2000 (Cryptoassets) was laid before Parliament in December 2025 and is pending approval, designed to come into force in October 2027.² Currently, firms must register with the FCA for AML purposes and financial promotions.

Centralized Trading Venues

Centralized Exchanges

Digital asset exchanges are fragmented compared to public markets, with liquidity spread across multiple venues. Each platform has its own pricing mechanisms, margin requirements, liquidation thresholds, and fees, creating arbitrage opportunities but also separate counterparty risks. In addition, product offerings vary according to local regulations. 

This fragmentation can present risks during times of market stress, as thin liquidity can cause sharp price divergences across venues. Unlike traditional markets, digital assets lack standardized circuit-breakers that automatically pause trading during extreme moves. Instead, exchanges may experience access outages when activity is high.

Another key difference in digital assets is that CEXs combine trading, custody, clearing, and settlement. In traditional finance, independent central counterparties handle the clearing, netting out positions across the system and managing counterparty risk. Custody is undertaken by regulated intermediaries such as banks. 

FTX’s 2022 bankruptcy halved global trading volumes as traders pulled back from the market due to loss of counterparty trust given the collapsing of functions into one entity.³ Volumes remained muted through most of 2023, with flows concentrating on larger exchanges that were perceived to be “safer.” This reversed as participants adopted risk mitigation strategies—using segregated qualified custodians rather than pre-funding on exchanges, then mirroring their collateral on the exchange for trading.

In traditional finance, settlement occurs through regulated central securities depositories (CSDs) such as Euroclear and Clearstream, which keep omnibus accounts for each custodian bank. At the bank level, assets are held in segregated accounts for institutions, while individual investors have beneficial claims managed by custodians.

If a custodian becomes insolvent, client assets remain legally distinct and held in trust, making them unavailable to creditors. Custodians must maintain client segregation and undergo regular audits. 

In contrast, digital asset exchanges are vertically integrated, executing trading, clearing, and settlement in-house. When users deposit digital assets, they are sent to an exchange-controlled wallet on the blockchain and are pooled with other customer funds, known as a custodial wallet. 

The exchange will hold a portion of deposits in a hot wallet, which is connected to the internet for liquidity purposes, while the majority remains in cold storage or offline for added security. Ownership is tracked on the exchange’s internal ledger.

Trading occurs off-chain via centralized order books and matching engines, with settlement as an internal ledger update. Blockchain confirmation is only required for withdrawals or transfers between exchanges.

Regulators are aligning CEXs with traditional financial standards. Under MiCA, crypto asset service providers (CASPs) must segregate customer assets and undergo independent audits.⁴ In the UK, the FCA is proposing segregated custody in non-statutory trusts to protect customers in case of insolvency.⁵

Over-the-Counter (OTC) Trading

OTC trading in digital assets caters to institutional needs but differs from traditional markets. These large, off-exchange trades occur directly between counterparties, often via an OTC broker or desk, bypassing centralized exchanges. 

OTC trading enables sizable or customized trades, such as structured derivatives, without moving the market and with greater discretion. Growth has accelerated as more institutions enter the space, including brokers offering credit, cross-margining, tailored settlement, custody, and access to fiat off-ramps. One study reported a 113% year-over-year increase in OTC volumes in the first quarter of 2025.⁶

Unlike traditional OTC trades, digital assets OTC trades can occur 24/7 on-chain, with funds transferred via wallets and verified within minutes to hours. However, if there is a fiat leg, settlement relies on traditional banking and may take several days.

OTC desks can connect buyers and sellers, perform Know-Your-Customer (KYC)/Anti-Money Laundering (AML) checks, negotiate terms, facilitate trades, and sometimes act as principals. Trades may be pre-funded or use escrow, with settlement typically at T+0 on-chain or via custodians, whereas traditional OTC trades settle through clearinghouses. 

As with centralized exchanges, due diligence on counterparties such as brokers, platforms, and escrow services is essential. Under MiCA, authorized CASPs must conduct counterparty checks, adopt internal policies to preserve market integrity, and meet reporting requirements, mirroring obligations for traditional OTC participants.⁷

In the UK, these service providers must register with the Financial Conduct Authority and meet Money Laundering Regulations (MLR) obligations, although digital assets OTC trading does not yet fall under a regulated activity. New rules are expected as UK draft legislation brings dealing in or arranging deals in qualifying crypto assets into the FCA’s perimeter.

Prime Brokers

Prime brokers have emerged as a solution to address the fragmented nature of centralized digital asset exchanges, where traders otherwise post collateral individually, transfer funds between venues, and monitor multiple positions simultaneously.

These brokers can extend credit, act as counterparties, provide access to centralized and OTC platforms, enable cross-margining for capital efficiency, and often include custody via regulated custodians.

These firms are not directly comparable to prime brokers in legacy markets as these are normally regulated investment banks with Basel III capital and liquidity requirements. 

Investment Vehicles and Their Evolution

Spot Trading and Futures

As in legacy markets, derivative volumes far exceed spot, offering leveraged exposure and hedging tools. In 2025, monthly digital asset exchange volumes averaged $7.1 trillion, with futures accounting for 76% of the total.⁸

Most of these are perpetual futures—contracts without expiration—allowing traders to maintain positions indefinitely if margin requirements are met, eliminating the need for rollovers.

Perpetual futures rely on funding rates, or fees paid approximately every eight hours to keep contract prices in line with spot. If the contract price is above the spot (often due to bullish retail sentiment), longs pay shorts, and vice versa. Market makers arbitrage price discrepancies between spot and future perps. The risk is that liquidation can occur in volatile markets and funding rate costs can spike, requiring constant monitoring. 

Liquidation occurs if a trader’s margin falls below maintenance levels determined by the venue, but occasionally there is also the risk of auto-liquidation. Although some exchanges have insurance funds, at times these are not sufficient to cover shortfalls if losses are greater than the collateral, so winning positions may get closed. A lack of bids in a thin market can exacerbate losses as positions get sold.

Due to the launch of spot bitcoin ETPs in the U.S. in 2024, trading volumes and gross futures exposure accelerated. Between January 2024 and January 2026, exchange bitcoin futures open interest, predominantly perpetuals, rose from $13.8 billion to $31.4 billion, outpacing price.⁹ Meanwhile, open interest on the CME for its standard expiring BTC futures grew over fivefold to $23 billion by December 2024 before retracing as investors unwound the carry trade and reset post the October 2025 liquidation event.¹⁰

CME activity reflects institutional participation as approximately 90% of CME activity consists of asset managers and hedge funds. Hedge funds can go short CME futures versus long spot bitcoin ETPs to capture the basis trade, locking in the futures premium to spot as the market is generally in contango.¹¹

Regulatory treatment varies by region. In the U.S., the CFTC permits trading of options and traditional futures on fully regulated futures exchanges, such as CME. However, rules for perpetual futures are still evolving. In the UK, derivatives are restricted to professional investors.¹² Across Europe, professional investors are generally permitted to trade derivatives on a licensed venue as they fall under the definition of financial instruments under the Markets in Financial Instruments Directive (MIFID II).¹³

Options

In addition to the growth of the institutional futures market, there is increased activity in the options market. Open interest in BTC options expanded from $11 billion in January 2024 to a high of $57 billion in October 2025, eventually falling back to $28 billion by January 2026.¹⁴ Options provide asymmetric exposure, the ability to build more precise and complex strategies, and volatility trading.

Looking to traditional markets, the options market in U.S. equities has experienced double-digit compound growth in average daily volumes over the last decade, with a notable 51% surge in 2020.¹⁵ This growth was likely a result of many factors, including easier access, lower costs, and more information and tools available to investors.¹⁶

Deribit is the largest exchange focused on digital assets options with 85–90% market share globally (excluding the U.S.).¹⁷ The platform offers European spot bitcoin options, which are directly tied to the price of the coin and are cash-settled in the underlying coin itself (inverse) or in USDC dollar-pegged stablecoins (linear). Cash settlement in this context means only the intrinsic value of the option is paid at expiry, and not the underlying asset. Linear options were launched in 2025 and are more akin to cash settlement in traditional options.¹⁸

These options act as European-style options, meaning they can only be exercised at expiration, and the underlying asset for each contract is the token, such as BTC or ETH. However, traders can close their position in the open market at any time before expiry. They differ from American-style options that can be exercised at any time up to and including their expiration date.

Exchange-Traded Products

The launch of regulated bitcoin futures on CME in 2017 helped pave a path for U.S. spot bitcoin ETPs, which were approved in January 2024. Futures provided pricing transparency linked to spot markets, enabling regulators to approve a product that could trade on traditional stock exchanges. Although this product already existed in Europe, the U.S. launch opened the door for mainstream investors in the world’s largest financial market to gain exposure via a bitcoin wrapper. 

The first spot ETP launched in Switzerland in 2018 followed by several jurisdictions, including Germany, Sweden, France, Italy, and the Netherlands. In the UK, a bitcoin ETP was made available to institutional investors in May 2024, with retail access introduced in October 2025. 

European ETPs are typically structured as exchange-traded notes referencing the token price as under UCITS regulation, these do not qualify as direct underlying assets. Single asset exposure also violates diversification rules. These wrappers may appeal to institutions because of their operational efficiency and similarity to traditional financial instruments in terms of trading, clearing, and settlement.

In practice, most ETP assets and liquidity are concentrated in the U.S. The U.S. spot bitcoin ETP became the most successful exchange-traded product launch in history, achieving the fastest asset accumulation ever recorded.¹⁹ 

Index options on bitcoin ETPs have also proven popular with investors. In contrast to the European-style options on bitcoin’s price, options on the ETP price are physically settled with ETP shares and have American-style expiration.²⁰

Infrastructure: Custody 

Unlike traditional markets where assets are custodied by regulated institutions like banks, digital asset custody centers on safeguarding private keys. These are bearer assets, so whoever controls the keys controls the funds, and on-chain transactions are irreversible, leaving no recourse if the keys are lost or misused. 

Private keys grant access to funds and are linked to a public key, which generates a public address, similar to a bank account number. Many individuals choose to self-custody via a wallet and interact directly with the blockchain without the need for a centralized intermediary. There is usually a 12- to 24-word seed phrase to generate the keys. This provides control but also presents operational risks.

When trading on exchanges, investors can either deposit funds directly onto the exchange for custody or may safekeep assets with a separate, regulated custodian that holds the private keys and manages security, transaction signing, and compliance. Here, counterparty risk remains crucial as it does with other intermediaries.

To mitigate single-point failure, custodians employ multi-signature wallets that require more than one private key to authorize transactions and/or Multi-Party Computation (MPC), which splits keys into encrypted shares so no single device ever holds the whole key.

Conclusion

The digital assets market in the UK and Europe is evolving into a more mature and investable ecosystem, offering institutional investors portfolio diversification benefits and access to a potentially transformative asset class. With increasing regulatory clarity, expanding infrastructure, and sophisticated trading and custody solutions, digital assets are becoming more accessible and aligned with traditional financial standards. 

Looking ahead, the UK plans to bring crypto firms—including exchanges, custodians, and wallet providers—fully under the existing financial services framework by October 2027, overseen by the FCA and Bank of England in the case of systemic stablecoins. This new regime will apply the same governance, transparency, and conduct standards as traditional financial services, with detailed rules expected in 2026 following a series of FCA consultations.

Understanding the structural dynamics and challenges unique to the space will be essential for informed investment and effective risk management.

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