Chicago Catches Crypto Fever with Barrage of Bitcoin Developments

During an earnings call on November 7, Cboe president and COO Chris Concannon said the Chicago Mercantile Exchange’s (CME’s) decision to launch futures based on bitcoin validated the exchange group’s position on the digital commodity—Cboe announced on August 2 that it would be launching its own futures contracts based on bitcoin next year.

“Overall, the cryptocurrency space is the space that I think we believe in and certainly our competitor across town believes in as well,” he said. “And I’m just encouraged by that validation.”

Indeed, the CME doubled down on its support that day, with its chairman emeritus Leo Melamed telling Reuters that bitcoin would become an asset class in its own right, and that the CME would “tame” it.

However, while the market appears to be brimming with enthusiasm over bitcoin—which broke a valuation of $7,000 per coin after news about the CME’s futures contracts hit the wires—there are elements of it that are looking at how the current trading ecosystem can be improved.

The Global Digital Asset Exchange (GDAX), for instance, one of the largest exchanges for bitcoin, ether and other currencies, released a framework last week by which it will admit new digital currencies to trading, a largely qualitative framework, but one which nonetheless demonstrated an important step toward considering precisely how these instruments should transact.

Part of the drive behind this, says David Farmer, director of business operations at GDAX, is the sharp growth in digital assets over the past year.

“Since January 1, 2017, the total market capitalization of all digital assets has increased over 10 times to reach a current valuation of approximately $200 billion,” he says. “Customers often ask us how we decide which assets to support. By sharing this framework we hope to improve transparency and highlight the factors we evaluate when considering which new assets to support on GDAX.”

Indeed, support for these sudden developments in bitcoin’s growth within regulated markets—in addition to Cboe and CME’s initiatives, LedgerX also gained approval to trade and clear bitcoin options earlier this year—is not universal. Even asset managers that specialize in bitcoin seem uncomfortable at the pace.

One executive at a European bitcoin-focused hedge fund told WatersTechnology that he was “surprised” at the announcements, and that he felt uncomfortable about “how fast this was all moving.”

That concern has been mirrored in some areas by regulators, who have become increasingly focused on how bitcoin, ether and other digital assets fit into the legal structures surrounding investments and securities law.

On November 1, the US Securities and Exchange Commission (SEC) warned that promotion of initial coin offerings (ICOs) by celebrities may be unlawful if the nature, source and amount of compensation paid for the endorsement were not disclosed.

That followed a string of high-profile musicians and sports personalities endorsing ICOs and digital currencies through social media platforms, including Twitter and Instagram, leading the UK’s Guardian newspaper to declare cryptocurrencies “the new celebrity accessory.”

The SEC is not the only regulator to be concerned about ICOs. On September 12, the UK Financial Conduct Authority (FCA) warned that such investments were high risk and that it could only decide on whether ICOs fell inside the regulatory perimeter on a “case-by-case” basis. The US Commodity Futures Trading Commission (CFTC) is also looking at how it can regulate bitcoin and any derivatives that have the digital commodity as an underlying asset, but chairman J Christopher Giancarlo recently told WatersTechnology sibling publication Risk.net that no new powers would be needed.

Digital currencies also took a blow to their reputations this week when a coding error in Ethereum allowed a developer to inadvertently take control of multi-user wallets, and then lock them when he tried to give them back to their owners in a panic, effectively freezing over $300 million in ether.

“There are still teething problems that might need to be worked out before futures in regulated markets should be considered,” says the hedge-fund executive. “You can’t just list a couple of contracts, say it has a derivatives market, and suddenly it’s safe for the entire Street. We take the risk based on a deep analysis and understanding of the market. If you start to see exchange-traded funds and similar products now coming down the pipe, you’re distributing a lot of unknown risk into portfolios controlled by people who may be experts at traditional asset classes, but not the peculiarities or volatilities in digital assets.”

Indeed, an example of bitcoin’s relative immaturity can be found in GDAX’s framework. While comprehensive in listing the factors it will consider in determining whether or not an instrument should be traded on the exchange, it’s light on specific quantitative criteria.

“We do not have plans to disclose precise quantitative guidelines for market cap or volatility,” says GDAX’s Farmer. “At this stage in the development of the industry, there are no quantitative factors that would lead to us deciding to add, or not add, an asset. We do not want to anchor the community to a precise value or metric at this time.”