Scepticism lingers as bitcoin future exchanges seem all go
More mainstream investors sought while regulators scratch heads
Two US exchanges are racing to embrace bitcoin, dragging regulators into a realm sceptics call a fad and fraud. The development shows how some big financial players are moving to co-opt the volatile cryptocurrency and lure more mainstream investors into the market, even before regulators have agreed on just what bitcoin is.
CME Group’s contracts will debut on December 18.
Cboe Global Markets didn’t announce a start date. Both got the green light on Saturday after going through a process called selfcertification — a pledge to the US Commodity Futures Trading Commission that the products don’t run afoul of the law. The news pushed bitcoin’s price higher.
The moves are a watershed for Wall Street professionals — including institutional investors and high-speed traders — who’ve been eager to bet on cryptocurrencies and their wild swings, but worried about doing so on mostly unregulated markets.
The new products are subject to CFTC oversight. CME, Cboe and Cantor Fitzgerald LP’s Cantor Exchange — which is creating another kind of bitcoin derivative, binary options — vowed they would help the agency surveil the underlying bitcoin market.
“Bitcoin, a virtual currency, is a commodity unlike any the commission has dealt with in the past,” CFTC chairman Chris Giancarlo said on Saturday.
“We expect that the futures exchanges, through information sharing agreements, will be monitoring the trading activity on the relevant cash platforms.”
Trading in bitcoin and other cryptocurrencies is largely unregulated, and that’s the point. Bitcoin was introduced after the 2008 financial crisis as a way of avoiding governments and central banks. Now with its meteoric rise and the proliferation of cryptocurrencies, banks, brokers and mainstream investors want in. And they want regulation, something they’ll get plenty of in a market such as CME or Cboe’s.
“The launch of the futures will actually make the market healthier,” Cboe president Chris Concannon said. “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.”
US financial regulators have struggled to agree on what, exactly, bitcoin is and what risks it might pose. That left its enthusiasts and financial professionals unsure which government agencies might try to police the rapidly growing market. In addition to the CFTC, there’s the Securities and Exchange Commission (SEC), the Internal Revenue Service and the Treasury Department’s FinCEN, which tracks illicit payments.
The CFTC declared in 2015 that it would treat bitcoin as a commodity.
“But the IRS says it’s property, the SEC said now some digital currency is a security, and FinCEN says digital currency is a ‘money-like instrument,’” said Adam White, general manager of GDAX, a cryptocurrency exchange owned by Coinbase.
His company wished to work with all of them, he said, while offering his own definition: “It’s a new asset class.”
After Saturday’s announcement, exchanges and the CFTC will have to keep tabs on that underlying market, according to Jeff Bandman, who until June advised chairman Giancarlo on financial technology issues.
“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,” Bandman, who now runs Bandman Advisors, said before the announcement. “This would represent a new opportunity for mischief.”
There are other ways the new futures could spur more vigorous oversight of the cryptocurrency. The contracts, for example, could make it easier to create an exchange-traded fund tied to bitcoin — even after a previous attempt was knocked down.
That could enlist the SEC. In March,
This would represent a new opportunity for mischief. Jeff Bandman
the agency rejected a bitcoin ETF proposed by Tyler and Cameron Winklevoss — co-creators of the Gemini exchange — saying necessary surveillance-sharing agreements were too difficult given that “significant markets for bitcoin are unregulated”. Cboe is basing its futures on prices from Gemini.
Earlier, a top SEC official weighed in. David Shillman said a strong bitcoin futures market could make the regulator more comfortable in approving bitcoin ETFs.
Many mainstream investors and their brokers, lured by bitcoin’s meteoric rise this year, wouldn’t mind some government oversight to head off potential abuses. But regulating these futures only works so well if the underlying market isn’t safe.
“The problem with the futures contracts is they are regulated derivatives that are based off underlying trading in unregulated markets,” Richard Johnson, a market-structure analyst at Greenwich Associates who specialises in blockchain, said before the announcement. “That does create a potential problem.”
Since digital currencies began emerging, US regulators have faced a dilemma: The laws that empower watchdogs and delineate their areas of responsibility were written when money was minted on paper, companies turned mainly to the stock market for capital, and commodities came from farms, mines or wells. Many authorities have held back, studying what to do.
There was too little co-ordination on regulation, said Justin Slaughter, former aide to a CFTC commissioner, who consults on financial technology as a partner at Mercury Strategies. “It’s been very scattershot . . . confused.” profits higher.
After a gain of 2.8 per cent in November the S&P 500 has gained 18 per cent so far this year, thanks in large part to big gains for technology companies such as Apple, Google’s parent company Alphabet and Facebook.
Meanwhile, central banks are still steadying the markets with bond purchases and low interest rates.
The end of those stimulus programmes are in sight, but by historic standards bond yields are low, which makes stocks more appealing as investments and makes it easier for people and companies to borrow money.
In the US, investors like President Donald Trump’s cuts in regulations and lower corporate taxes.
It’s also been a historically calm year for the market, with stock indexes hitting records at a steady pace. Given all that, conditions seem right for further gains in December.
One concern for investors and experts is that stocks are expensive relative to their earnings.
Then again, they’ve felt that way for most of the year and stocks kept going higher.
And as usual, investors will keep an eye on the Federal Reserve and the US economy: stocks might falter if Wall Street senses economic growth isn’t strong enough, or a combination of weak growth and rising interest rates might slow the economy.
Investors believe the Federal Reserve will raise interest rates at its meeting on December 13.
Ablin, of BMO Capital Markets, says some investors might refrain from buying in December and wait until January for tax reasons.
But even in a surprisingly good year, there’s reason to think the market will have a solid finish: When the S&P 500 is up 15 per cent in the first 11 months of the year, it does better in December than in years with lesser gains, according to Ryan Detrick of LPL Financial.