Trends | CryptoCurrencies
New Jersey–based swap execution facility (SEF) TeraExchange completed the first bitcoin derivatives transaction ever to be settled on a regulated exchange on October 9, forcing the Commodity Futures Trading Commission to consider whether or not it has jurisdiction over the new instruments. The CFTC is also debating whether nondeliverable forward (NDF) contracts for emerging markets currencies must be centrally cleared and whether the agency should go forward with a proposed rule on the issue.
The CFTC hosted a public discussion (not a hearing) on October 9 at its Washington, DC, headquarters on both issues. The futures and options markets regulator also created a foreign exchange advisory panel that includes such industry leaders as Troy Rohrbaugh, co-head of global rates, foreign exchange, commodities and emerging markets at J.P. Morgan; Jason Vitale, global head of foreign exchange prime brokerage at Deutsche Bank; and Phil Weisberg, global head of foreign exchange at Thomson Reuters. The panel will examine the feasibility and framework for clearing NDFs and the pricing and structure of digital currency derivatives.
CFTC commissioner Mark Wetjen says the fact that a bitcoin contract exists doesn’t mean the CFTC endorses it. There are at least several other SEF platforms already registered, or soon to be registered, that intend to list other bitcoin-denominated contracts, he says. “Only with additional understanding can the CFTC be confident that it can effectively execute on its mission of preserving the proper functioning of a cryptocurrency derivative market, which includes enforcing rules intended to prevent manipulation of these markets,” Wetjen says. “We must remain vigilant and evaluate these new contacts over time.”
There are potential benefits that bitcoin or bitcoin-like technology—as opposed to the cryptocurrency itself—could bring to the derivatives marketplace, Wetjen says. “Settlement and other trustee-like services are at the core of the bitcoin-technology protocol,” he says. “Any type of open-sourced, public-ledger technology seemingly could be useful in the derivatives space, where monies and collateral are frequently transferred and settled throughout a trading day.”
TeraExchange says it worked closely with the CFTC for more than six months as it prepared its self-certification, which it filed in September. The dollar/bitcoin swap provides institutions with a hedge, or a way to take a view on the market, at a time when the bitcoin’s value has been volatile, says Leonard Nuara, president and co-founder of TeraExchange.
Tim Byun, chief compliance officer at BitPay, an Atlanta-based merchant processor, told the CFTC’s discussion session that 40,000 merchants now accept bitcoin, which was introduced in 2009. “You could tie a few US Treasuries to the protocol and let that be exchanged and validated,” Byun says. “The core of bitcoin is really just a validation system.”
New York Law School professor Houman Shadab says regulators should take a hands-off approach to bitcoin and let the market see what it can achieve on its own. “If there is a system that can revolutionize finance by making it more decentralized, cheaper and faster, you should try it,” Shadab says.