New Guidance From CFTC on Crypto Derivatives
The U.S. Commodity Futures Trading Commission (CFTC) has released guidance to American exchanges and clearing houses who list cryptocurrency derivatives, such as bitcoin futures. The statement comes at a time when large finance sector players are making moves in the cryptocurrency space and planning to offer new derivatives products.
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CFTC Wants to Aid Participants in the Crypto Derivatives Market
The advisory statement issued by the CFTC’s Division of Market Oversight (DMO) and Division of Clearing and Risk (DCR) departments, provides guidance on the listing of what the commission calls “virtual currency derivatives contracts.” Currently, bitcoin futures are the only cryptocurrency derivative available in the U.S., and were approved for trading by the CFTC with the CME, CBOE, and TD Ameritrade last December.
CFTC Director Brian Bussey said in a statement:
“CFTC staff is providing this information, in part, to aid market participants in their efforts to design risk management programs that address the new risks imposed by virtual currency products. In addition, the guidance is designed to help ensure that market participants follow appropriate governance processes with respect to the launch of these products.”
The value of cryptocurrency futures contracts are based on prices on crypto exchanges, which are, by-and-large, unregulated with little transparency provided by their operators. In order to ensure that the futures contracts are not subject to manipulation or price distortion, the CFTC wants the derivative exchanges to conduct surveillance on their crypto counterparts by enacting real-time monitoring.
This includes setting up arrangements whereby data such as trader identity, prices, volumes, times, and other information from the crypto exchanges are available to the derivatives exchanges at all times. This places a burden on the derivatives exchanges, but the CFTC thinks that is warranted, “given the nature of the underlying spot market.” In other words, crypto exchanges are suspect in the eyes of the commission.
The Troubled History of Many Crypto Exchanges
While the list of crypto exchanges suffering irregularities and hacks is long and dates back at least to Mt. Gox in 2014, some recent examples include Japanese exchange Coincheck, which was hacked for around $400 million USD worth of NEM (XEM), and South Korean exchange Upbit, recently raided by authorities due to allegations of fraud (with investigations ongoing).
On the even shadier end of the crypto exchange ledger is the infamous BitGrail, the ultimate graveyard of millions of dollars worth of Nano (XRB), operated by Francesco Firano.
Not all crypto exchanges have had problems, however, and some are working to be compliant with regulators. The American Gemini exchange last month said it will be using technology from NASDAQ to monitor itself for manipulation. This is exactly what the CFTC is hoping will happen, and it’s not surprising that CBOE bitcoin futures contracts use Gemini to determine bitcoin prices.
Other countries, like Japan, are establishing new laws and moving ahead with self-regulation in order to prevent future problems. Korean exchanges have similarly created a self-regulatory body (with Upbit opting out). Yet, due to the global nature of cryptocurrencies, national regulations have their limits. Some exchanges like Binance skirt national laws by changing jurisdictions and moving operations multiple times. Others, like Bitfinex, who have historically resisted regulation, have begun moving towards complying with some national rules.
New Entrants Into Crypto Space Coincide With Increased Regulation
The new guidance comes at a particularly busy time in the crypto space, as major financial institutions such JP Morgan are beginning to make aggressive plays. Goldman Sachs is also reportedly planning to begin offering a new kind of derivative called a “non-deliverable forward,” likely also based on bitcoin. And though an ETF based on bitcoin has yet to appear, it would likely require CFTC approval in some fashion if cryptocurrencies continue to be seen as commodities.
The CFTC has other requirements for derivative exchanges. It expects them to watch out for and report so-called “Large Traders,” who make trades exceeding a value of five bitcoins that could manipulate markets. Additionally, the commission expects derivatives exchanges to stay in close contact with them and communicate with market participants and accept comments from them when listing new contracts.
Have your say. Is the CFTC developing a sensible approach toward regulation?
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