On Monday, the U.S. Commodity Futures Trading Commission (CFTC) made an important announcement, granting approval to Cboe, one of the largest U.S. options exchanges, to provide margined futures contracts for Bitcoin and Ether. This development comes at a crucial time when certain sectors of the U.S. cryptocurrency industry are facing offshore migrations due to concerns over regulatory enforcement. The decision by the CFTC represents a positive step forward in an era of uncertainty, according to Cboe Digital president John Palmer.
Expanding the U.S. Framework:
Palmer emphasized that rather than witnessing a contraction, the U.S. crypto industry is experiencing expansion within its regulatory framework. He expressed his satisfaction with the collaborative efforts between Cboe Digital and the regulators, highlighting the positive representation of hard work on both sides of the fence. This approval signifies progress and serves as an example of the ongoing commitment to fostering a robust and responsible environment for cryptocurrency trading.
Understanding Margined Futures Contracts:
Futures contracts are derivative financial instruments enabling customers to speculate on the price movements of assets such as Bitcoin and Ether. Although primarily utilized by institutional investors, these contracts are gaining popularity among retail investors, particularly in the crypto space. Cboe Digital had previously offered crypto futures contracts but had not permitted margin trades. Previously, traders were required to post the full price of a Bitcoin to engage in futures contracts. However, with margined contracts, traders need to post only a fraction of the value initially, resulting in lower upfront costs and the potential for higher returns on deployed capital.
Unique Offering by Cboe:
While other platforms, including the CME Group, offer margined futures contracts for crypto assets, Cboe’s new approval holds a unique advantage. Cboe Digital provides spot trading and futures trading under the same entity, allowing users to trade directly based on the current price of assets like Bitcoin and Ether. This arrangement benefits traders, such as market makers and customers seeking greater efficiencies for various strategies like basis trading, which involves exploring price differentials between spot and futures contracts.
Contrasting Approaches: Cboe vs. FTX
Cboe’s model stands in contrast to a proposal by the now-defunct crypto exchange FTX, which sought a different approach for futures contracts with the CFTC. Cboe users cannot directly purchase futures contracts from the platform; instead, they must go through futures commission merchants (FCMs) who act as intermediaries, buying or selling contracts on behalf of clients. FTX’s proposal aimed to eliminate the middleman by allowing customers to post margin directly to FTX without brokers, a process known as disintermediation. However, this approach faced criticism from traditional finance players who expressed concerns about increased access to risky investment products for retail investors and the allocation of additional responsibility to platforms.
The CFTC’s Stance and Cboe’s Approval:
CFTC commissioner Christy Goldsmith Romero supported Cboe’s approach, affirming the traditional model’s reliability. In a statement following Cboe’s approval, Romero emphasized that the proposed FTX model, which was never adopted by the Commission, posed risks to customers’ bankruptcy priority, customer protections, and financial stability. Cboe’s approval aligns with the CFTC’s commitment to ensuring the safety and integrity of the market.
Crypto’s Future in the United States:
Cboe’s approval arrives at a time when several crypto companies, including Coinbase and Gemini, are relocating offshore to launch derivatives exchanges. While Palmer acknowledged that their primary motivation is to offer perpetuals, a popular kind of crypto derivatives contract not yet approved domestically, he commended the regulators’ work in the United States.
