The Cryptos are Creeping Towards the Exchanges

October 17, 2017 01:07 PM
Dimon, LedgerX, CBOE & bcause


This summer, LedgerX became the first U.S. regulated exchange and clearinghouse for digital currency derivatives.  LedgerX, a New York-based institutional trading and clearing platform for digital currencies, received approval to operate a swaps execution facility (SEF) by the Commodity Futures Trading Commission (CFTC). 

“Our focus is on derivatives contracts that settle to bitcoin, so that a lot of our customers who actually want to withdraw the bitcoin for the clearinghouse can actually go ahead and do things with it afterwards.” says Paul L. Chou CEO and co-founder of LedgerX. 

Chou says LedgerX will start with vanilla calls and puts on bitcoin itself and plans to launch in early fall when traders get back to work and trade in earnest. 

LedgerX is planning a slow rollout but their goal is to provide a broad range of derivatives on cryptocurrencies. “In the beginning the vast majority of demand will be around call production on physically settled bitcoin,” Chou says. “The second category would be what we call day-ahead swaps. This is more of a linear product where you are allowed to purchase a swap and get physically delivered bitcoin tomorrow.”

For LedgerX there are two main buckets of customers to capture. Those that have bitcoin and need to hedge that exposure, and the broader universe of folks who simply look to gain access to and speculate on innovative and emerging markets. 

“If you have bitcoin itself, you can pledge it to the clearinghouse, sell the swap against it and receive dollars tomorrow,” Chou says. “Whether you have to own it depends on the style of transaction you want to do.  If you just want to purchase the call option, then all you have to do is put U.S. dollars at the clearinghouse. If you are looking to sell a day-ahead swap, then you have to put a bitcoin to the clearinghouse before you can do it.” 

The options offered at LedgerX are not intermediated, they are fully margined. 

LedgerX is not unique, though they are the first to receive regulatory approval. There are many exchanges in the works with the goal of bringing the cryptocurrency phenomena into an institutional structure and help turn it into a ready for prime time asset class. 

In August, CBOE Holdings and Gemini Trust Company, LLC announced an agreement that provides CBOE and its affiliates with an exclusive global license to use Gemini’s bitcoin market data for bitcoin derivatives and indexes.  Gemini is a digital asset exchange and custodian founded by Tyler and Cameron Winklevoss that allows customers to buy, sell, and store digital assets such as bitcoin and [ethereum].

According to the announcement CBOE plans to launch cash-settled bitcoin futures on CBOE Futures Exchange in the fourth quarter of 2017 or early 2018, pending regulatory approval. 

In the release Ed Tilly, CBOE Holdings Chairman and CEO said CBOE’s history of innovation across multiple asset classes, “Makes us the natural choice for the development and trading of bitcoin futures.” He added, “We look forward to responding to the growing interest in cryptocurrencies through the creation of bitcoin futures traded on a regulated derivatives exchange, with the many expected benefits that this brings.”

Bcause, LLC, is a financial technology firm founded by actual rocket scientists who were mining bitcoin and came up with the concept of a derivatives exchanges because there is no way to short cryptocurrencies or hedge their exposure to them.

Bcause has had an application to become a futures exchange that will trade bitcoin and other cryptocurrencies before the CFTC for some time. “The centerpiece of the strategy is a CFTC-regulated derivatives exchange in cryptocurrencies,” says bcause CEO Fred Grede. “There are a lot of things that are happening in the cryptocurrency space today. We are out there talking to a lot of proprietary trading firms [and] market making firms who are also just starting to get into this space,” Grede says. “Obviously the price of bitcoin has attracted a lot of people; people who you wouldn’t think of ever trading this product.” 

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About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.