On July 6, the U.S. Commodity Futures Trading Commission (CFTC) announced it had granted Bitcoin exchange LedgerX status as a swap execution facility (SEF).
It’s almost hard to believe that just four months ago the Bitcoin community was still reeling from the Winklevoss twins’ loss over their Bitcoin ETF filing with the SEC. The news sent Bitcoin’s price plummeting almost 18% and ended a months-long rally (before quickly recovering and shooting to its current record highs).
Now, the U.S. Commodity Futures Trading Commission (CFTC) has just made a historic announcement: It has issued an Order of Registration to LedgerX LLC (LedgerX), granting it registration status with the CFTC as a Swap Execution Facility (SEF).
LedgerX still has one more hurdle to overcome: It must also be approved as a derivatives clearing organization by the CFTC. According to The National Law Review:
If approved, LedgerX “would be the first federally regulated bitcoin options exchange and clearing house to list and clear fully-collateralized, physically-settled bitcoin options for the institutional market.
Solving The Collateral Conundrum
The New York-based swaps start-up has been seeking for years to start a Bitcoin futures trading company. Their initial plan is to release physically settled puts and calls on Bitcoin. In order to do this, however, they first need approval from the CFTC, the regulatory body that oversees US futures and options markets.
The problem: In order to protect its customers as a collateralized exchange, LedgerX needs to maintain a minimum amount of cash reserves relative to its customer holdings in digital currencies. The impracticality of meeting such a demand has been enough to force Bitcoin exchanges out of states likes Hawaii, where similar laws exist for even simple exchanges.
Undeterred, LedgerX managed to overcome this hurdle by raising $11.4 million in funding in May. The group also previously raised $1.5 million in seed funding back in 2014 from Google Ventures and Lightspeed Venture Partners.
These stable cash reserves proved to be the final requirement for LedgerX’s approval. The company now only needs approval as a derivatives clearing organization before they can begin operating.
Steady As She Goes
Placing options such as puts and calls allows investors to monetize an asset’s volatility. With Bitcoin’s infamous price swings frequently being described a “roller coaster” or “rocket to the moon“, capitalizing on such volatility almost comes as a no-brainer for savvy investors.
Such news comes at a time when market volatility is higher than ever. As experimental new features such as stop orders and margin calls are being implemented by trading platforms, unexpected side effects such as flash crashes are now being seen.
Ironically, derivatives markets have the effect of stabilizing asset prices by giving traders more control over risk and increasing market liquidity. The overall effect of Bitcoin futures trading could ultimately be a more stable market.
Is Bitcoin ready for derivatives trading? Is this another sign that digital currencies are becoming a speculative commodity, rather than a decentralized currency? Let us know your thoughts in the comments below.
Images courtesy of Max Pixel, Wikimedia CommonsShow comments