CFTC Insider: Ether Futures May Soon Be Approved By Regulator

The US Commodity Futures Trading Commission (CFTC), an independent agency of the American government that regulates the futures and options markets, may soon approve Ether (ETH) futures contracts. According to sources familiar with the matter, the CFTC could allow exchanges to offer ETH futures - provided the contracts adhere to the appropriate regulatory guidelines.

In statements reportedly shared with Coindesk, a spokesperson for the CFTC said:

I think we can get comfortable with an ether derivative being under our jurisdiction. We don’t do bold pronouncements, what we do is we look at applications before us. A derivatives exchange comes to us and says ‘we want to launch this particular product.’ … If they came to us with a particular derivative that met our requirements, I think that there’s a good chance that it would [get] self-certified by us.

Commenting on the matter, John Todaro, the Director of Digital Currency Research at Tradeblock, a provider of institutional trading tools for cryptoassets, remarked: “Many funds have mandates that do not allow them to buy the digital currency underlying.”

Todaro, a former bonds trader, added that a cash-settled futures contract which issues payouts in fiat currency, instead of the underlying cryptocurrency, would make it easier for hedge fund managers “to gain exposure to Ether.” He explained that they would not have “worry about custody (which has been a bottleneck to institutional investment).”

Todaro also noted that in the long-term, a CFTC-regulated crypto futures market “could usher in confidence among [other federal] regulators such as the [US] Securities and Exchange Commission (SEC) which could pave the way for a [cryptocurrency-based] exchange-traded fund (ETF).” This would add even more liquidity to the larger Ether market.

According to Todaro, an increase in institutional investments in the cryptoasset market would encourage more retail investors to enter the crypto and blockchain industry.

Notably, the launch of BTC futures contracts by the CME and Cboe received a positive response as the Cboe’s website crashed due to the large number of orders placed by traders (when the product was first introduced). Some analysts also argue that the Bitcoin price reached its all-time high of nearly $20,000 in December 2017 (partly) because of the launch of BTC futures.

CFTC Asked For More Information On Ethereum In Dec 2018

However, several analysts also believe that the introduction of Bitcoin futures may have resulted in a decline in the cryptocurrency’s price. According to Todaro, Bitcoin’s price was already headed towards an all-time high and that the launch of BTC futures (at around the same time) may not necessarily have any connection with bitcoin’s price.

In December 2018, the CFTC had revealed, for the first time, that it was looking into whether it should approve Ether futures contracts. The federal regulator had published a “Request for Input” (RFI) which consisted of several questions related to Ether’s market capitalization and Ethereum’s underlying technology.

CFTC’s questions also included those which asked about the proof-of-stake (PoS) consensus mechanism which Ethereum’s network will transition to, as it currently uses the proof-of-work (PoW) consensus protocol. CFTC’s questions also asked for more information, or disclosure, regarding how Ether deposits are processed and audited.

Looking Into "Range Of Issues" That May Arise After Launching ETH Futures

Moreover, the US commodities regulator inquired specifically about the potential impact of Ether futures on the larger cryptoasset market.

George Pullen, a senior economist at the CFTC, had previously noted:

After our initial public white papers, primers, on virtual currencies, bitcoin, and smart contracts it was clear that a one-size fits all approach to crypto was not appropriate and we needed to know more.

Pullen further mentioned that the RFI would help the CFTC better understand “the range of issues that might exist” if an Ether futures contract were offered. Pullen remarked (in March 2019):

It’s critically important for us to engage in outreach to understand the variety in technologies, markets, and the differences in the community; if we’re just listening to our own voices inside the building, the loudest voices in business, or just the voices in D.C. we could miss out on the bigger picture.

In December 2017, the CME Group (Chicago Mercantile Exchange) and the Cboe (Chicago Board Options Exchange) began offering cash-settled BTC futures contracts. 

Weekly Newsletter

What Exactly Is Facebook’s ‘Libra’ Cryptocurrency? What Are Its Challenges?

The new decade is set to launch with one of the most ambitious cryptocurrencies yet, with the social media giant Facebook’s ‘Libra’ expected to start trading in a few months. The new coin certainly has the muscle behind it: in fact, it has an entire Libra ‘Association’ that consists of companies such as Spotify, Farfetch, Uber, Lyft, PayU (Naspers’ fintech arm), and Calibra. Along with a plethora of other venture capital firms spanning the blockchain and telecommunication networks, and some non-profit organisations.

The ‘vision’ of Libra is put in no uncertain terms on its official website. That is to create: a stable global cryptocurrency built on a secure network… enabling a more inclusive global financial system.

Libra’s Ambitions, and How It Will Work

What Facebook and the other giants hope to achieve is to connect everyone in possession of a mobile phone to the global financial infrastructure. These are what Facebook considers the ‘unbanked’, those who do not have access to a bank, but who do have a mobile phone.

Libra would give these unbanked masses the ability to transfer money across the world instantly, on a secure network and at a low cost. If implemented, Libra would be an example of ‘leapfrogging’ technology, in which developing societies bypass what traditionally would have been a necessary technological evolution (i.e. the establishment of more banks) in order to get to an end point.

Libra’s Security Other and Concerns

Current proposals put Libra on a blockchain that encompasses around 100 computer servers, at least that’s the ambition. The blockchain algorithms will be programmed to work as what’s known as a “command-line programme”, something that will make scripting and interactive usage possible; with an interface of consistent options and file formats. For further security, Libra is also thought to be using Byzantine fault-tolerant consensus approach. This means that, in theory, the wider blockchain cannot be compromised even if one of the servers is disrupted.

But not everyone has faith in the new cryptocurrency, even with all the financial backing it has. Again, in theory, it should be almost impossible for a cyberattack to disrupt Libra’s blockchain, as a third of its 100 servers would have to be disrupted before such an attack could even be launched.

The Libra Association has also stressed that each of its members will have their own server, and that it will be supported independently by them and secured. Furthermore, the blockchain will have its own consensus-based algorithm. Meaning that transactions must be approved by two-thirds of all the servers before going ahead. This should make transactions more measurable and efficiently processed. Facebook has even said that Libra would be capable of processing a thousand payments per second, which would make it about 500 times more efficient than Bitcoin is today.

Libra and the Issue of Regulation

Despite the proposed ambitiousness of Libra, the United States and European Union regulatory bodies are yet to be won over. They already do not like the strength of pre-existing cryptocurrencies. Some countries have even outright banned them.

To get round this problem, the Libra Association has marketed its currency as one that has been specially designed to be friendly to regulators from the get-go. They insist, for example, that Libra is a stablecoin. If true, then this should alleviate some national fears for its potential implications on monetary policies. Still, there are concerns that if the Libra is very popular, it could become “Too Big To Fail”, which of course is a phrase still haunted by the 2007-08 economic crises.

The reason for these TBTF anxieties lies in the fact that Libra is intended to be collateralised by other currencies and some debt obligations. If there was ever a run on Libra, it would lack a centralised bank to mitigate the damage.

Libra’s special status means it will be a global currency and not specific to any one nation. So it is only natural that some national governments have expressed concerns about how it will impact on their unilateral monetary policies. Libra’s global status assures that it will fluctuate differently to any one other currency, meaning it will be shaped by its underlying assets, and may even resemble something like an index in volatility.

One way to address these fears may be found in a report conducted by the Association of German Banks. The AGB has suggested restricting Libra for payment transfers only, and not giving it the ability to provide loans. this would prevent the cryptocurrency from becoming a money creation system in its own right.

Libra — Will It Be Safe to Invest In?

Cryptocurrencies have enjoyed successful investment status and investment is predicted to keep increasing until 2020 at a minimum. Blockchain investments in the Libra cryptocurrency should be considered as a hedge in a diverse portfolio to protect against falls in other types of investments. Of course, at the moment Libra is not an asset that can be invested in… yet. But once it comes online, there’s no reason it won’t enjoy the success of others (not including the decline of Bitcoin, which may be in response to more competition from other cryptocurrencies).

Once online, Libra should be safe to invest on optimised cryptocurrency trading platforms that can handle automated and manual trading.

Libra and the Future Market

iven other fears including loss of tax revenues and transaction fees, traditional banks have already acknowledged that change is coming. In its ‘Future of Finance’ report, the Bank of England has already said that “hard infrastructure” needs to make room for, and can work with, “soft infrastructure” (cryptocurrencies). But what needs to be in place is a “well-respected” judicial and legal system, along with clear regulations, standards and rules.

As for the Libra cryptocurrency, no one can doubt the ambition of such a project. But whether it is something that the market actually needs is still a question that no one as of yet has an answer for.

Featured image by Tim Bennett on Unsplash.

This article was written by Neil Wright of Oakmount Partners Ltd, an investment consultancy firm based in Essex, UK.