Two major US exchanges are currently competing to become the first exchange platform to embrace Bitcoin, which puts federal regulators in the no man’s land as they are still struggling to come to a consensus when it comes to what Bitcoin actually is. The initiative is coming from CME Group Inc. and Cboe Global Markets Inc., which shows that some big financial players are ready to capitalise on adopting this volatile cryptocurrency and luring more mainstream investors into the market.
CME Group Inc.’s announced that they will offer Bitcoin Futures on their platform on 18th December, whereas Cboe Global Markets Inc. are yet to announce an official date. Both entities have gone through a process called self-certification – which is a pledge to the U.S. Commodity Futures Trading Commission that the products don’t run afoul of the law, and have been successfully given a green light.
This is a great piece of news for most Wall Street professionals, ranging from institutional investors and day traders, who have been long waiting to capitalise on the volatile cryptocurrency market but have refrained from doing so due to the lack of any regulations. The trading of cryptocurrency on these two platforms are subject to CFTC oversight.
Additionally, Cantor Fitzgerald LP’s Cantor Exchange has joined CME and Cboe in their attempt to surveil the underlying bitcoin market.
CFTC Chairman Chris Giancarlo said in a statement on Friday:
“Bitcoin, a virtual currency, is a commodity unlike any the commission has dealt with in the past. We expect that the futures exchanges, through information sharing agreements, will be monitoring the trading activity on the relevant cash platforms.”
One of the main appeals of Bitcoin and cryptocurrency is the fact that it’s unregulated, which has drawn so many people in the cryptocurrency market. However, banks, brokers and mainstream investors have been reluctant to jump at this opportunity due to the lack of regulation, which is something that CME and Cboe will resolve.
After the news came out on Friday, Cboe President Chris Concannon said in an interview:
“The launch of the futures will actually make the market healthier. It will create pricing equilibrium in the market. Clients who are holding bitcoin now have no way to hedge their risk. These products allow them to hedge, and to take opposing views. More importantly, it brings a wave of regulatory oversight.”
Why do regulators struggle when it comes to Bitcoin?
Financial regulators in the United States have struggled for years to agree on what, exactly, Bitcoin is and what its most accurate definition and classification is. As a result, the cryptocurrency market could come under the regulation of several government agencies, such as CFTC, Securities and Exchange Commission, the Internal Revenue Service and the Treasury Department’s FinCEN, which tracks illicit payments.
CFTC declared back in 2015 that it would treat Bitcoin as a commodity, IRS claims it is a property, SEC regards it as a security and FinCEN says it is a ‘money-like instrument’. Adam White, general manager of GDAX, a cryptocurrency exchange platform owned by Coinbase, believes that “It’s a new asset class”.
Jeff Bandman, former advisor on financial technology issues for Chairman Giancarlo and current president of Bandman Advisors, previously said in a statement:
“It’s well understood that bad actors can take actions in the spot market for a commodity where the reward or payoff is the derivatives market and vice versa. This would represent a new opportunity for mischief.”
Exchange-Traded Funds tied to Bitcoin
The soon to be available contracts could potentially create the opportunity to design an exchange-traded fund (ETF) to Bitcoin – something which was attempted before but failed. If that was the case, the SEC would have to get involved and this could lead to a more rigorous oversight of the cryptocurrency market.
In March 2017, SEC rejected a Bitcoin ETF proposal by Tyler and Cameron Winklevoss — the co-creators of the Gemini exchange – claiming that because significant markets for bitcoin are unregulated, it would be difficult to agree on the necessary surveillance.
David Shillman, associate director in the SEC’s division of trading and markets, said a strong bitcoin futures market could make the regulator more comfortable approving bitcoin ETFs.
Many of the Wall Street professionals would find it quite appealing if there was some sort of government oversight over the cryptocurrency market, as this could head off potential abuses. However, if the underlying cryptocurrency market is not safe, there is only so much that regulating these futures can do.
Richard Johnson, a market-structure analyst at Greenwich Associates who specialises in blockchain, said in a previous statement:
“The problem with the futures contracts is they are regulated derivatives that are based off underlying trading in unregulated markets. That does create a potential problem.”
Another major issue when it comes to regulating the cryptocurrency market is the current laws and guidelines, which have been mostly built and written decades ago, when money was minted on paper, companies turned mainly to the stock market for capital, and commodities came from farms, mines or wells. Consequently, many of these US authorities have not given a precise opinion on these regulatory issues, something which is seen in the UK as well.
Justin Slaughter, a former top aide to a CFTC commissioner who now consults on financial technology and regulation as a partner at Mercury Strategies, says that a significant issue that needs to be overcome is getting all these different regulators to understand that every single one of them has a role to play in this, but importantly they have to work together.
“It’s been very scattershot, it’s been somewhat confused,” he said.
Original article on Bloomberg