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. 

CME Looks to Double Bitcoin Futures Limit, but Is This Wise?

The Chicago Mercantile Exchange (CME) has a new request for its regulator, as it looks to double open position limits on bitcoin futures contracts in the face of significant interest.

Nasdaq reports that the CME has already petitioned its regulatory body, the Commodity Futures Trading Commission (CTFC), asking for an increase from 1000 contracts per spot month to 2000 per investor. Each contract represents five BTC, so essentially, at its peak,  a single investor's total position may edge towards a monumental 10,000 BTC.

This is in direct response to the contract's recent growth which is currently depicting record levels of activity, citing $370 million being traded per day. A spokesperson for the CME noted that the idea to increase limits was proposed on the continued maturity of the market:

Based on the significant growth and acceptance of our financially-settled CME Bitcoin futures markets, as well as our analysis of the underlying bitcoin market.

However, as Nasdaq writes the increase in the upper limit of positions is somewhat superfluous. As of July, the number of open interest contracts reached an all-time high of just 6100; given this, it seems the CME may be future-proofing.

Open to Manipulation?

However, concerns remain about the limit increase, as without them, the potential for manipulation rises; often to the detriment to the underlying asset. Although, as per the CTFC website, the threat of manipulation from bitcoin futures contracts is "low":

In general, position limits are not needed for markets where the threat of market manipulation is non-existent or very low.

Instead, Nasdaq posited that this might point to a lessening on the CTFC's strict rule of bitcoin; as well as a maturing of the market in general.

Nevertheless, some believe the CME's bitcoin futures contracts do pose a significant threat to the price of BTC; with some suggesting that blatant manipulation continues unchecked within the market.

As reported, there seems to be a correlation between the expiry dates of CME bitcoin futures contracts and a lull in the price point of BTC. In several instances, a significant drop in bitcoin's price has coincided with a closure from the CME. The most recent example of this occurred on Labor Day, September 2, when bitcoin rose an extraordinary 8% shortly after the CME shut.

Crypto analyst, Alex Kruger, highlighted this, noting the large gaps which formed on the CME chart, from the price discrepancy before and after closing.

This has become a pretty accepted practice within the market. Kruger has even gone to the lengths of compiling statistics each time this phenomenon transpired:

On these occasions, bitcoin cited an average 4.6% price discrepancy following the close of the CME.

Whether this is a coincidence or the market is indeed being actively manipulated is as yet unclear. Either way, with the increase of these limits it might be only a matter of time until we know for sure.

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