CFTC Approves First Regulated Bitcoin Derivatives Exchange and Clearinghouse
The U.S. Commodity Futures Trading Commission (CFTC) has approved institutional bitcoin derivatives platform Ledgerx LLC as the first federally-regulated bitcoin options exchange and clearinghouse. Ledgerx plans to start trading bitcoin options in the fall and ether options a few months after that.
The First Bitcoin Exchange and Clearinghouse Approved
Founded in 2013, institutional bitcoin derivatives trading and clearing platform Ledgerx has been approved by the CFTC as a fully-regulated bitcoin options exchange and clearinghouse. The Commission approved the company as a Swap Execution Facilities (SEF) early this month and then, on Monday, as a Derivatives Clearing Organization (DCO).
Ledgerx has become the first digital currency platform to be both a SEF and a DCO. The Commission announced on Monday:
By a unanimous vote of the Commission, it has issued an order granting Ledgerx, LLC (Ledgerx) registration as a derivatives clearing organization under the Commodity Exchange Act (CEA)…Under the order, Ledgerx will be authorized to provide clearing services for fully-collateralized digital currency swaps.
Ledgerx CEO Paul Chou conveyed to Reuters that it took the Commission more than two years to grant his company the two statuses, due to a long education process. He has also been a member of the CFTC’s Technology Advisory Committee. In May, the company received funding of $11.4 million led by Miami International Holdings Inc and Huiyin Blockchain Venture Investments.
Ledgerx plans to launch bitcoin options in the early fall, and ether options “within a few months,” Chou told CNBC. “Initially, Ledgerx expects to list one- to six-month option contracts for bitcoin. Other digital currency contracts such as ethereum (ETH) options are expected to follow,” he told Reuters.
Institutional Investors Can Now Enter the Space
“Having a regulated clearinghouse will open the market to a lot of other investors such as large institutions,” Reuters quoted Chou saying, adding that a proper regulatory framework will make institutional investors comfortable and open the market up to them. He further commented:
We are seeing strong demand from institutions that previously could not participate in the bitcoin market due to compliance restrictions against unregulated venues. In particular, there is a desire for fund managers to hold financial instruments that are not correlated with the broader equity market, and digital currencies meet that need.
In an interview with CNBC, he said “we’re really excited to welcome a whole host of parties that traditionally have been very retail-oriented.” Furthermore, he expects “very large asset managers to enter the space” as a result of the CFTC’s approval.
In addition, the CFTC has granted Ledgerx an exemption from Section 39 of the Commodity Exchange Act. The Commission wrote, “in response to a request from Ledgerx, the Commission’s Division of Clearing and Risk also today issued a letter exempting Ledgerx from complying with certain Commission regulations due to Ledgerx’s fully-collateralized clearing model.”
Without this exemption, Ledgerx as a clearinghouse would have to undertake monthly stress tests of its financial resources “to ensure that it could withstand the default of its largest participant,” Waters Technology explained. Chou told CNBC that the exemption was due to his company’s plan to “not allow very leveraged trading.”
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Images courtesy of Shutterstock, CFTC, and Ledgerx
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