Digital currencies have been all the hype this year, particularly from investors’ point of view. It was only a year ago that the price of bitcoin stood at $960.47. Compare this to the levels it has risen to in the last two weeks of this year—in mid-December it surpassed the $19,000 mark, only to drop down to $12,000 in a wild period of volatility.
While digital currencies have already caught the eyes of retail and institutional investors, alarm bells are ringing in regulators’ offices. Some, such as the Securities and Exchange Commission (SEC) in the US and the Monetary Authority of Singapore (MAS) have said some digital currencies and initial coin offerings (ICOs) will come under their purview if they resemble investments and hence qualify as securities.
But the biggest developments came in at the end of the year, when Cboe Global Markets and the Chicago Mercantile Exchange (CME) Group launched tradable futures contracts on their respective venues. While widely seen as “legitimizing” bitcoin, these moves—which have been since mirrored by rival groups, the majority of whom are preparing their own futures or exchange-traded products for 2018—also brought concerns about how the volatility of the nascent asset class may affect critical pieces of market infrastructure, such as clearinghouses.
Below are 10 stories that capture this shift:
Before bitcoin futures became all the rage, a small New York-based startup won its years-long battle for recognition by the US Commodity Futures Trading Commission to operate a clearinghouse and an electronic platform for trading bitcoin options. LedgerX’s platform became one of the first regulated markets to do so, paving the way for later developments.
Six months ago, even start-ups in the crypto space were warning that its market structure was not mature enough to support institutional activity as of yet. This was most clearly explained by Paul Gordon, CEO of Quantave, who described how traditionally segregated roles pertaining to trading, custody and other areas are conflated in digital currency markets at present.
WatersTechnology followed up these concerns with an in-depth look at the controls at some of these exchanges, following a flash crash in the value of ether that caused mass controversy in the middle of the year. The conclusion was that while the market was not ready for institutional involvement yet, interest was reaching a fever pitch, a prediction that would be borne out later in 2017.
A landmark study by the SEC found that ICOs could, in fact, fall under Federal securities laws in the sense that many constituted an investment in a legal sense. This was followed by a range of reactions—from the ICO runners, many of whom moved their offerings outside of US jurisdiction, to other regulators, such as China’s, which banned ICOs outright.
Although Cboe was the first to take the plunge into bitcoin futures, the most heavily anticipated move was made by its larger rival, CME, at the end of October, when it announced that it too would be offering its own suite of contracts. Heavily margined, at least by comparison to traditional futures, there are still concerns about their safety.
WatersTechnology followed up our prior investigation into US digital currency exchanges with a similarly in-depth look at how Asian regulators—in particular, those in Japan, Singapore and China—are handling the thorny subject of cryptocurrency trading. While Japan has been remarkably quick to legislate, perhaps in response to the notorious failure of the Mt.Gox exchange several years ago, others are also gaining ground in legislating for the new asset class.
The interesting thing about Cboe and CME’s contracts is the differences between them, in terms of lot size (five bitcoins for CME, one for Cboe) and reference pricing. But there were also other moves afoot late in the year, such as popular digital currency exchange GDAX clarifying to WatersTechnology—sort of—what digital currencies it would admit to trading in the future.
Speaking about differences between contracts, WatersTechnology learned from people familiar with the matter that Nasdaq was planning to launch its own bitcoin futures in mid-2018, but with a twist—rather than referencing one exchange, as with Cboe’s, or four, as with CME’s through the use of its reference rate, Nasdaq would aggregate pricing from over 50 venues.
This remarkable warning from the US regulator came on the eve of Cboe launching its futures contracts, where the CFTC effectively pulled off an abrupt about-face by saying, actually, it didn’t have much authority to regulate the underlying cash markets. Previously, CFTC chairman Christopher Giancarlo had been bullish about the fact that the regulator had enough powers. Not so much.
While Cboe’s bitcoin futures surged in the first few hours of trading, tripping circuit breakers twice, the level of activity had been modest in the week leading up to CME’s launch, which seemed equally restrained. Both exchanges, however, had their circuit breakers triggered again when bitcoin suddenly fell off a cliff in value the following week, dropping from $19,000 per coin to around $12,000.
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