Wind vane, senior US CFTC official: willing to approve a compliant Ethereum futures contract

A senior official said that the US Commodity Futures Trading Commission (CFTC) is willing to approve an Ethereum futures contract, provided that the contract meets all regulatory conditions.

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The Commodity Futures Trading Commission (CFTC), which oversees the US derivatives market, has previously approved the CME Group in Chicago and the CBOe Global Exchange to provide cash-settled bitcoin contracts in 2017. The official said that now, the regulator is willing to approve a similar product for Ethereum. In terms of market capitalization, Ethereum is currently the second largest cryptocurrency in the world, second only to Bitcoin.

The person who asked not to be named said:

“I think we can accept Ethereum derivatives under our jurisdiction.”

"We don't make bold statements. What we do is to review the application before us," the official explained:

“If a derivatives exchange finds us, say, 'We want to launch this special product.'… If they come to us with a special derivative that meets our requirements, I think we are likely to (allow ) It carries out self-certification."

However, the person said that the CFTC will only respond to the specific Ethereum futures application submitted to the regulator, and will not take the initiative to provide comments.

If proposed and approved, regulated futures products will open the Ethereum market to a wide range of institutional investments.

John Todaro, head of digital currency research at financial block provider Tradeblock, said:

“Many fund mandates do not allow them to purchase digital currency.”

In addition, cash-settled futures contracts paid in French currency instead of cryptocurrency will enable hedge funds and other institutions to “obtain the concern of hosting issues (the problem of managed services has always been an obstacle to institutional investment in cryptocurrencies) and to gain access to Ethereum. He said.

Todaro added that in the long run, the futures market regulated by the CFTC “may build confidence in regulators such as the SEC (the US Securities and Exchange Commission), paving the way for cryptocurrency ETFs”. ETF is an exchange-traded fund that brings extra liquidity to Ethereum.

Todaro said that the increase in institutional investment will in turn boost retail investors' confidence in Ethereum.

When the Bitcoin futures of the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (Cboe) were launched, they immediately received positive responses from institutional investors, and the company’s website collapsed due to the excessive number of people trying to buy Cboe’s contracts. The launch of these futures contracts may also be one of the reasons why bitcoin prices soared to an all-time high of nearly $20,000. Of course, some people think that futures may also hurt the price of Bitcoin, but Todaro said that it is more likely that the price of Bitcoin has reached its peak at that time, and the approval of futures is just the same.

Learning process

The CFTC first stated in December last year that it is studying Ethereum. At that time, the regulator issued an “input request” (RFI), which raised a series of questions about Ethereum, Ethereum surrounding markets and related technologies. In terms of market capitalization, Ethereum is the second largest cryptocurrency in the world.

These issues include PoS (Ethernet is expected to eventually adopt this consensus mechanism to replace bitcoin-style PoW mining) and how to audit Ethereum deposits.

The agency specifically asked how the introduction of a derivative contract might affect the cryptocurrency.

George Pullen, senior economist at CFTC's market regulator, told CoinDesk at the end of March that the RFI was looking for industry and market information on Ethereum risks, mechanisms and use cases.

He explained that the CFTC especially wants to compare Ethereum with Bitcoin:

“After we first published white papers and reference materials on virtual currency, bitcoin and smart contracts, it became clear that a measure that applies to all cryptocurrencies is not appropriate and we need to know more.”

He added that the CFTC's RFI will help regulators understand "a range of possible problems" in the Ethereum field and build a better relationship with the encryption world.

“For us, developing outreach activities to understand the diversity of technology, market diversity and community is crucial; if we just listen to our own voice in the building, the loudest voice of the business community, or just Washington. The voice of the SAR, we may miss a bigger vision," Pullen explained at the time.

Industry associations such as the Chamber of Digital Commerce, think tank Coin Center, start-ups Blockchains LLC and Circle, Coinbase and other exchanges and self-proclaimed bitcoin creators Craig Wright and other CFTC The RFI submitted a total of 35 comments.

The CFTC, or at least CFTC Chairman J. Christopher Giancarlo, has become very popular in the encryption community, and after he called for light-touch supervision of the field, the community gave him the nickname "Encrypted Dad."

Take power?

In addition to allowing investors to acquire a new derivative product, the approval of a futures contract may also strengthen the CFTC's regulatory power over the underlying spot market.

It is worth noting that the digital asset and futures trading platform ErisX (which hopes to provide bitcoin, bitcoin cash, Litecoin and Ethereum futures after its derivatives clearing house license is approved) believes that it will supervise Ethereum futures. The contract will give the CFTC some additional supervision of the Ethereum spot market.

Thomas Chippas, chief executive of the Chicago Board of Trade, wrote in a response to the RFI that a futures contract “contains a settlement price determined by the actual settlement price of the US spot market”, which may improve the CFTC’s “correct regulation”. Or the ability to monitor fraud and manipulation of the spot market." ErisX declined to comment on this article.

Several lawyers interviewed by CoinDesk said that CFTC may already have certain jurisdiction over the Ethereum cash market. However, this power is limited.

Anne Termine, head of Covington & Burling LLP's futures and derivatives business, told CoinDesk that regulators have made it clear that cryptocurrencies are commodities.

"Therefore, the CFTC has limited regulation of the cryptocurrency spot market, that is, once these spot markets are fraudulent or manipulated, the CFTC may not be able to take enforcement action," Termine said.

Amy Davine Kim, chief policy officer for the Chamber of Digital Commerce, a blockchain advocacy group in Washington, DC, points out that regulators are cheating or manipulating the cryptocurrency spot market. Have “post-event” enforcement jurisdiction, but have no jurisdiction over exchanges that only conduct spot transactions.

Moreover, anything that is not a security is generally defined broadly as a commodity, she said.

The question of whether Ethereum is a security has not yet been officially resolved, but SEC officials seem to think that it is not. William Hinman, the corporate finance director of the agency, said at a meeting in 2018 that he did not think Ethereum was a security.

In March of this year, SEC Chairman Jay Clayton seemed to confirm his remarks. Clayton writes that he agrees with Hinman's analysis that crypto assets may not be a security, but he did not specifically mention Ethereum.

Termine explained that the introduction of “a futures contract would mean that the jurisdiction of the CFTC would go beyond the scope of anti-fraud and manipulative terms.” Such a futures contract would have to be traded on a CFTC-regulated futures exchange, meaning it would be subject to regulatory Direct supervision.

Termine concludes that:

“This means that the broader community means that the CFTC will strengthen its regulation of Ethereum, but it may also legalize cryptocurrencies.”