Going mainstream: Bitcoin on a rampage
washington — Bitcoin’s stratospheric rise last week follows the digital currency’s embrace by mainstream trading platforms and is seen by some in finance as normal growing pains often experienced by innovative technologies.
Nasdaq is the latest major financial market to reportedly plan to launch a bitcoin futures exchange next year, although the exact timing is unclear. The US derivatives regulator said on Friday it would allow CME Group and CBOE Global Markets to list Bitcoin futures, after the rival bourses were able to show their proposed contracts and trading arrangements met the necessary regulatory requirements.
The announcement by the Commodity Futures Trading Commission (CFTC) paves the way for CME and CBOE to become the first traditional US regulated exchanges to launch trading in Bitcoin-related financial contracts, in a watershed moment for the cryptocurrency that should lead to greater regulatory scrutiny.
The listing of Bitcoin products by derivative markets is a major indirect endorsement that this thing is here to stay David Yermack,
After starting the year at around $1,000, Bitcoin, which first appeared in 2008, on Wednesday surged as high as $11,434 before promptly falling 15 per cent. Near 1900GMT on Thursday, the virtual currency stood at $9,839.
The cryptocurrency rebounded on Friday to hit the day’s highs above $10,500, recovering from an earlier dip below $9,500, after the CFTC’s announcement. To guard against volatility, CME and CBOE will put in place stricter than usual risk-management safeguards, including initial margin requirements of between 35 per cent and 40 per cent.
The exchanges have also agreed to enter into information sharing agreements and to send the CFTC data on the settlement process so the regulator can conduct its own surveillance.
CFTC Chairman Christopher Giancarlo warned investors, however, that the nascent underlying Bitcoin cash markets remain largely unregulated and mostly beyond the CFTC’s purview.
Brokerage firm Cantor Fitzgerald also is looking to begin trading Bitcoin derivatives on an exchange it owns.
“The asset class is not going away,” Cantor Fitzgerald chief executive Shawn Matthews told The Wall Street Journal. The exchanges will trade Bitcoin derivatives, not the currency itself, including futures, which set prices for a commodity or financial instrument at a future date.
“The listing of Bitcoin products by derivative markets is a major indirect endorsement that this thing is here to stay,” said David Yermack, a finance professor at New York University, adding that the markets will attract new investors who bet that Bitcoin will fall in value. Yermack, who teaches a course on Bitcoin and cryptocurrencies, is closely watching the development of blockchain, the underlying technology behind Bitcoin.
Bitcoin has been propelled by the rising prominence of blockchain, which leading banks increasingly view as being at the heart of financial technology, Yermack said. Still, “it is hard to come up with an explanation for why [Bitcoin] has been driven by a factor of 10 since the start of the year,” Yermack told AFP. “It is just mind-blowing.” Fed Vice Chairman for Supervision Randal Quarles warned Thursday that digital currencies could pose a threat to financial stability because it is unclear how they would perform in a crisis.
“The ‘currency’ or asset at the center of some of these systems is not backed by other secure assets, has no intrinsic value, is not the liability of a regulated banking institution, and in leading cases, is not the liability of any institution at all,” he said in prepared remarks.
“While these digital currencies may not pose major concerns at their current levels of use, more serious financial stability issues may result if they achieve wide-scale usage,” said Quarles.
The embrace of Bitcoin by mainstream exchanges has aided the digital currency’s image after it was once associated with drug dealing and money laundering. It also was viewed as risky because it is not regulated or backed by a central bank . — AFP/Reuters