CME Group Inc. and Cboe Global Markets Inc. are poised to offer bitcoin futures contracts, easing the way for mainstream investors to bet big while dragging regulators into a realm skeptics call a fad and fraud.
CME, the world’s biggest exchange owner, and smaller venue Cboe, known for its VIX volatility products, were allowed to offer the products after pledging to U.S. regulators that they comply with the law. CME said its contract will begin trading Dec. 18. Cantor Exchange, a subsidiary of Cantor Fitzgerald, also will offer bitcoin binary options.
The moves are a watershed for Wall Street professionals -- including institutional investors and high-speed traders -- who’ve been eager to bet on cryptocurrencies and their wild swings. But the new products will also spur federal regulation, with the contracts announced Friday subject to oversight by the Commodity Futures Trading Commission. All three exchanges promised to help the agency surveil the underlying bitcoin market.
“Bitcoin, a virtual currency, is a commodity unlike any the commission has dealt with in the past,” CFTC Chairman Chris Giancarlo said in a statement. “We expect that the futures exchanges, through information sharing agreements, will be monitoring the trading activity on the relevant cash platforms.”
Under a process called self-certification the exchanges assured the CFTC that the new products complied with the rules. While it doesn’t technically require CFTC approval, the regulator could have stayed their plans if they weren’t satisfied. Friday’s announcement allows them to go forward.
U.S. financial regulators have struggled for years to agree on what, exactly, bitcoin is and what risks it might pose. That’s left its enthusiasts and financial professionals unsure which government agencies might try to police the rapidly growing market. In addition to the CFTC, there’s the Securities and Exchange Commission, the Internal Revenue Service and the Treasury Department’s FinCEN, which tracks illicit payments.
The CFTC declared in 2015 that it would treat bitcoin as a commodity. “But the IRS says it’s property, the SEC said now some digital currency is a security, and FinCEN says digital currency is a ‘money-like instrument.’” said Adam White, general manager of GDAX, a cryptocurrency exchange owned by Coinbase. His company is trying to work with all of them, he said, while offering his own definition: “It’s a new asset class.”
Bitcoin, created in 2009, excited early investors with its potential use as a global currency, free from bank fees and government control. Transactions take place person-to-person around the world -- anywhere there’s Internet access. The cryptocurrency’s price skyrocketed in recent months, surpassing $11,000 this week before paring some gains.
After Friday’s announcement, exchanges and the CFTC will have to keep tabs on that underlying market, according to Jeff Bandman, who until June advised Chairman Giancarlo on financial technology issues.
“It’s well understood that bad actors can take actions in the spot market for a commodity where the reward or payoff is the derivatives market and vice versa,” Bandman, who now runs Bandman Advisors, said in an interview before Friday’s announcement. “This would represent a new opportunity for mischief.”