DISRUPTION BY DECENTRALIZATION: BITCOIN EXCHANGE-TRADED PRODUCTS & CRYPTODERIVATIVES, Vol. 3
As bitcoin’s volatility continues, investors have been looking for ways to capitalize on the price movement of the cryptocurrency. The Commodity Future Trading Commission (CFTC) is the latest U.S. regulatory agency to address bitcoin in the context of derivatives—financial devices where value derives from an underlying asset. In this case, the underlying asset is bitcoin.
The CFTC granted LedgerX, LLC’s application for registration as a derivatives clearinghouse organization (DCO) and swap execution facility (SEF).[1] Trading on the LedgerX platform started late last month and the CEO of LedgerX, Paul Chou, stated that institutional investors who wanted to participate in the bitcoin market previously could not do so due to a lack of regulation in the cryptoderivatives realm.[2] In effect, digital investors and miners will be able to hedge the volatility of the price of bitcoin or short the price under the oversight of the US regulators.
Many believe that the CFTC’s approval of LedgerX’s classification as a derivative clearinghouse will pave the way for exchange-traded products. On March 10, 2017, the SEC denied bitcoin investors Cameron and Tyler Winklevoss’ Bitcoin Trust’s application to issue commodity-trust exchange-traded products (ETPs), highlighting the trust’s inability to form surveillance-sharing agreements with “other significant, regulated, bitcoin-related markets.”[3] Surveillance-sharing agreements are formed between the exchanges and market regulators to ensure there is no manipulation in the underlying asset. The SEC specifically made a comment concerning the lack of a regulated bitcoin derivative market. Now that the CFTC has approved LedgerX’s application to open a derivatives exchange, experts believe this is a positive direction towards a more regulated bitcoin market and that we should expect more applications for exchange-traded products.[4]
Not all are optimistic about the opening of new derivatives and ETP markets. Notably, some suggest that listing derivatives is characteristic of behavior that precedes the bursting of bubbles, such as the introduction of the index that tracked mortgage-backed securities.[5] If bitcoin falls due to a bubble burst, then it will be interesting to see how it will affect the cryptocurrency market overall.
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[5] https://www.marketwatch.com/story/cmes-fang-and-bitcoin-futures-signal-the-end-is-near-2017-11-14