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Lawyer Claims Bakkt Can Bypass Approval for Physical Bitcoin Futures

Crypto lawyer Jake Chervinsky has determined that Bakkt does not need direct approval from the Commodity Futures Trading Commission (CFTC) to launch the physical Bitcoin futures, so it appears the launch date will proceed as scheduled.

The cryptocurrency markets are highly anticipating the launch of physical Bitcoin futures on Bakkt on 12 December 2018. It is a new cryptocurrency exchange which will be owned by the Intercontinental Exchange (ICE), the same organization that runs the New York Stock Exchange (NYSE).

14/ A designated contract market like ICE can file a self-certification submission as late as one business day before initial listing.

That means ICE technically doesn’t have to file Bakkt’s papers until Tuesday, December 11 for Bakkt to launch futures on Wednesday, December 12.

— Jake Chervinsky (@jchervinsky) November 6, 2018

According to Chervinsky, ICE is a CFTC certified designated contract market, allowing it to self-certify new futures offerings without any prior approval. ICE and Bakkt can submit the filing for physical Bitcoin futures as soon as one day before launch. Chervinsky says the CFTC will probably publish a press release about the futures when the self-certification occurs.

16/ Consider the process that CME & CBOE went through to get approval for their bitcoin futures last year.

Both of them ended up self-certifying, but only after *months* of negotiations with the CFTC & changes to their products.

The CFTC explains here: (https://t.co/B0tuugmPDx)

— Jake Chervinsky (@jchervinsky) November 6, 2018

However, if the CFTC disapproves of the physical Bitcoin futures, they could find some way to block them after launch. At this time, there is no evidence that this will happen otherwise, the controversy would have already been underway as seen when cash-settled Bitcoin futures were launched on the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBoE). It took months of negotiations for CME and CBoE to reach an agreement with the CFTC, even though those exchanges can self-certify like Bakkt.

Bakkt CEO Kelly Loeffler indicates that the plans for the physical Bitcoin futures would be reviewed and approved by the CFTC before launch, probably to maintain 100% compliance with regulators and avoid problems in the future.

The reason the Bakkt physical Bitcoin futures are important is that they would allow institutional investors to buy Bitcoin in a safe and regulated way on major stock trading platforms. The futures settle the same day and investors receive actual Bitcoin in their accounts, unlike the cash settled futures in Chicago. Market demand for the physical Bitcoin futures is expected increase demand on Bitcoin spot markets, which could possibly lead to a major Bitcoin price increase.

 

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Growth Over Time in Crypto Market Could Jumpstart SEC’s ETF Decisions

Asjylyn Loder, writing for the Wall Street Journal, feels that Bitcoin exchange-traded funds (ETFs) will happen; it’s just a matter of time.

After ten rebuffs to date, it must seem to these crypto companies that they are continually banging their heads against a wall. Loder reminds them that history is on their side, although when this history is examined, the time lag may be a bit of a wake-up call for the new players on the block, as she points out, “The first ETF pegged to volatility futures launched five years after the debut of the futures, and the first oil ETF followed oil futures by 23 years.”

However, those early applications have an advantage, which is clearly why they keep on coming. The hope is that at least one successful approval on ETF by the SEC would bring a tidal wave of institutional buyers to the market, picking up prices and moving Bitcoin in a long-awaited upward trajectory. For the hopefuls in the market, the track record so far isn’t good. It could be that the SEC is waiting for Bitcoin to move first.

With Gemini’s failure to become the first-ever cryptocurrency ETF on a regulated exchange came other subsequent rejections by the SEC: five more applications failing in the same week as the second Winklevoss attempt. This latest string of rejections seems to be a cementing of the SEC’s hard-line stance.

GraniteShares, one of the ten unsuccessful proposals to the SEC, sees the agency regarding crypto assets as a high-risk class, one of the issues that may add to the tardiness of any decision. Co-founder Will Rhind says the commission is even tougher on cryptocurrencies than conventional futures because of the risk factor, arguing:

“That risk has always been a disclosure issue… But in this case, we had to go way beyond that and prove that the market is not being manipulated, which is a standard that is impossible to prove.”

Patomak Global Partners chief executive Paul Atkins was on the inside once as an SEC commissioner. He sees time as crypto’s best friend: “Is [the SEC] a merit regulator, or should investors be able to decide for themselves what to invest in?”

With three re-evaluations by the SEC of proposals turned down earlier this year, in part because of the concern that the cryptocurrency market is too small, Loder agrees that time may well become the saving grace for Bitcoin ETFs. But if this is the case, Bitcoin trading would need to take the much-awaited leap forward which the crypto community is waiting for in order for the SEC to sit up and take notice.

 

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Morgan Stanley to Offer Clients Bitcoin Derivatives Trading

American multinational investment bank Morgan Stanley is reportedly planning to offer clients the chance to trade in Bitcoin derivatives, reports Bloomberg from an anonymous source.

The source, who claims to be close to the matter, shared with Bloomberg that the New York-based bank will be following in the footsteps of other Wall Street firms offering crypto-related services by dealing in contracts that give investors ”synthetic exposure to the performance of Bitcoin“. Investors will be given the option to go long or short using what is described as a ”price return swap”, with Morgan Stanley adding its own charge to each transaction that it facilitates.

Apparently, it is just waiting for enough institutional client demand and final approval for the internal processes to start offering these services, as the bank is already technically prepared for the Bitcoin trading.

While Morgan Stanley does not plan to trade in Bitcoin directly, the proposed services are tied to Bitcoin futures contracts. Any direct Bitcoin trading is unlikely to happen in the near future either, as CEO James Gorman has said customers will not be able to buy and sell directly through the bank.

Gorman has said, however, that the bank intends to build a cryptocurrency trading desk that will support derivatives of various digital currency assets. Andrew Peele, formerly of Credit Suisse Group AG, has been taken on by Morgan Stanley as head of digital asset markets to help institute this.

Goldman Sachs reaffirmed last week that it would not be abandoning its cryptocurrency trading desk, despite fake news report circling in the media. According to the firm’s chief financial officer Martin Chavez, the bank was even looking into expanding its crypto operations by launching a Bitcoin derivative.

Physical Bitcoin is not yet on the cards for Goldman Sachs yet, however, as Chavez explained: ”Physical Bitcoin is something tremendously interesting and tremendously challenging. From the perspective of custody, we don’t yet see an institutional-grade custodial solution for bitcoin, we’re interested in having that exist and it’s a long road.”

 

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CBOE to Launch Ethereum Futures Pending CFTC Approval

The Chicago Board Options Exchange (CBOE) is planning on launching Ethereum futures trading, pending approval from the Commodities Futures Trading Commission (CFTC). The futures are projected to launch by the end of 2018, and will be based on Ether’s price on the Gemini exchange. This would make it the only cryptocurrency besides Bitcoin to have official futures trading in the United States.

CBOE is one of two exchanges that offer Bitcoin futures trading, the other exchange being the Chicago Mercantile Exchange (CME). Bitcoin futures trading launched in December 2017 and has become a popular crypto investment mechanism, with billions of dollars of Bitcoin futures contracts traded on CME every month.

Ethereum is probably the only other cryptocurrency that has any chance of getting approved for futures trading by the CFTC. This is because the Securities and Exchange Commission (SEC) has declared Ethereum is not a security since it is sufficiently decentralized and, therefore, falls under CFTC jurisdiction as a commodity. Out of the thousands of different cryptocurrencies, only Bitcoin and Ethereum have been officially given the green light to be traded without SEC approval.

Additionally, Ethereum has the second highest crypto market cap at USD 28.6 billion as of this writing on 31 August 2018, versus Bitcoin’s market cap of USD 120.7 billion. Ethereum has trading volume in excess of USD 1 billion per day, making it liquid enough to support institutional investment, a key factor for being compatible with futures trading.

The launching of officially-regulated Ethereum futures has both a downside and an upside. The upside is that this will give institutional investors a way to invest in the cryptocurrency on major stock trading platforms, and could generate positive speculation in the Ethereum market.

The downside is that Ethereum futures contracts will be derivatives that are backed by cash and settled for cash, instead of being backed by actual Ether, effectively making them paper Ethereum. When institutional investors buy contracts, it won’t increase spot demand or price, and actually will divert money away from the spot Ethereum markets long term. Therefore, Ethereum’s price long term will probably be lower than it would be if this paper Ethereum on the CBOE futures market didn’t exist.

This isn’t the first time paper Ethereum has been issued however, BitMEX recently began offering Ethereum derivatives trading. This could be worse than anything possible on CBOE since BitMEX traders can short Ethereum and even leverage their shorts 100x. The CEO of BitMEX ominously called Ethereum a shitcoin and says it will crash to below USD 100, from its current position near USD 300. He said this right after BitMEX listed Ethereum.

 

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Cboe President Still Hopeful for First ETF Approval

The race to receive the coveted spot as the first Securities and Exchange Commission (SEC) approved Bitcoin exchange-traded fund (ETF) continues and Cboe Global Markets Inc believes it still has a chance to make it.

Speaking to Bloomberg, Cboe’s exchange operator’s president and chief operating officer Chris Concannon said that it was a matter of working through the issues that concern the SEC before an ETF can be approved. He believes Cboe can achieve this but recognizes the growth of a strong Bitcoin futures market may mean that a futures-based ETF may come first, rather than an exchange for the cryptocurrencies themselves.

What Concannon sees potentially problematic here, however, is that a futures-based ETF has never been done before, and it could be a struggle to find enough liquidity. Futures trading volumes have remained low compared with commodities contracts such as gold, although an ETF would certainly prompt a significant increase in trades. The SEC is hesitant to approve such an ETF until futures trading can provide sufficient liquidity, however.

Concannon said that he had learned there have been more articles than volume, describing the amount of media attention the market gets compared to its size as ”shocking”. He noted that the entire cryptocurrency market was only a fifth that of multinational technology company Apple.

Cboe was the first company to usher Bitcoin into mainstream finance during its bullish run in December last year, offering futures contracts for the cryptocurrency. Many interpreted this as a signal Wall Street was turning in favor of Bitcoin, with an ETF finally becoming foreseeable.

The SEC cited the potential for market manipulation in the nearly entirely unregulated market as the primary reason to deny approval, as was the case in the Winklevoss brothers rejection. The SEC said that they would require a surveillance sharing agreement with a large Bitcoin exchange to ensure no manipulation is taking place, of which the Winklevoss Bitcoin Trust could not provide at the time.

 

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ICE to Launch Exchange, Physically-Settled Bitcoin Futures

The Intercontinental Exchange (ICE), owner of 23 exchanges worldwide including the biggest stock exchange in the world, the New York Stock Exchange (NYSE), and many futures exchanges and clearing houses, is creating a cryptocurrency exchange called Bakkt. Starbucks and Microsoft will be major partners of Bakkt and will begin accepting Bitcoin and cryptocurrency. Even though this is all huge news, the biggest news might be that Bakkt is planning on launching physically-settled Bitcoin futures by November 2018, which would be a mechanism for institutional investors worldwide to easily buy Bitcoin.

Currently, there are Bitcoin futures contracts on CME and CBOE in Chicago, but these futures contracts are settled for cash, and therefore not a good way to buy actual Bitcoins, although there has been at least one exchange for physical (EFP) with the cash-settled futures contracts.

The Commodities Futures Trading Commission (CFTC) will have to approve Bakkt’s proposal but, if approved, it will be the first physically-settled Bitcoin futures in history. The futures contracts will expire every day and be settled for real Bitcoins, making this an excellent way for institutional traders around the world to buy Bitcoin. This could be just as good, or even better, than a Bitcoin exchange traded fund (ETF), which many experts have said would cause a major Bitcoin rally to levels far beyond USD 20,000.

Bakkt will have a built-in clearing house and cryptocurrency custodian, and will have all the regulatory compliance of any ICE exchange, so it seems the physically-settled Bitcoin contracts have a high chance for approval. These futures are projected to launch in November 2018.

Another major part of this story is that Starbucks will begin accepting Bitcoin and cryptocurrency via Bakkt. Vice President for Partnerships and Payments at Starbucks, Maria Smith, says, “As the flagship retailer, Starbucks will play a pivotal role in developing practical, trusted, and regulated applications for consumers to convert their digital assets into US dollars for use at Starbucks.”

If all goes according to plan, Bakkt could become the biggest cryptocurrency exchange in the world. This is perhaps the news all crypto enthusiasts have been waiting for, and the Bitcoin market has begun to crawl steadily upwards after this story broke the morning of 3 August 2018.

 

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CBOE Considering Ethereum Futures After SEC Decision

The President of the Chicago Board Options Exchange (CBOE), Chris Concannon says Ethereum futures could be available soon, following a decision from the Securities and Exchange Commission (SEC) that Ethereum won’t be regulated as a security.

The CBOE President says this decision gets rid of a major stumbling block that was hindering the path towards legally operating an Ethereum futures exchange, and that he is pleased with the SEC for making this clarification. Apparently, CBOE has been thinking about offering Ethereum futures trading since it first launched its Bitcoin futures exchange in December 2017. Bitcoin and Ethereum are the top 2 cryptocurrencies with market caps of 112 billion USD and 50 billion USD respectively as of this writing, 57% of the total cryptocurrency market cap of 281 billion USD.

The SEC provided some guidance for when cryptocurrencies can be defined as securities and when they do not meet the criteria. The Director of the Division of Corporate Finance at the SEC, William Hinman, said that any cryptocurrency which is sufficiently decentralized so no individual or organization is controlling it wont be considered a security. He explicitly stated that Ethereum is not a security and therefore is not under the jurisdiction of the SEC, making Bitcoin and Ethereum the only cryptocurrencies that have been given an all-clear by the SEC.

Ethereum prices rose from 480 USD to 520 USD following the SEC decision, and have since leveled off near 500 USD. The SEC decision is very positive news for the cryptocurrency world since now individuals and exchanges can trade Ethereum in the United States without an SEC broker-dealer license.

Bitcoin futures have been popular among institutional investment firms like Susquehanna International Group and may provide an avenue for institutional money to enter the Ethereum market. However, there is some concern that Bitcoin futures contract trading has damaged the market via manipulation, and that this same sort of manipulation could become an issue for the Ethereum market.

Bitcoin futures contracts can be used to short sell the market, where investors bet on the market going down and get more profit the lower the market goes. Thomas Lee from Fundstrat Global Advisors says investors might be selling lots of Bitcoin to crash the price in order to increase profits from their short positions. If this is true then the same sort of damaging manipulation would be possible on the Ethereum market after future contracts launch on CBOE.

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Bitcoin Futures Contracts Expiration Possible Cause of Market Volatility

The head of research at Fundstrat Global Advisors, Thomas Lee, says the expiration dates of future contracts may be a cause of market volatility and may be part of the reason Bitcoin’s price slid this past week.

Chicago Board Options Exchange (CBOE) Bitcoin futures contracts for June expired on 13 June 2018, and that same day Bitcoin dropped as low as USD 6,100 on Bitfinex. Lee says that Bitcoin drops on average 18% in the 10 days leading up to monthly futures contract expirations. So far there have been six future contract expiration dates since Bitcoin futures launched on CBOE in December 2017.

There were a couple of exceptions, in February 2018 Bitcoin price went up 15% as the expiration date approached, and in April 2018 Bitcoin’s price went up 16%. Lee says a more general observation is that there is significant price volatility, up or down, around Bitcoin futures contract expiration dates.

Lee found through his analysis that Bitcoin prices generally recover six days following contract expiration. Indeed, Bitcoin has recovered since the 13 June 2018 futures contract expiration from its low of USD 6,100 to USD 6,600 as of this writing, but has a ways to go before getting back to levels near USD 7,500 ten days before the contract expiration.

The possible logic behind Lee’s findings is that an investor who is holding a long Bitcoin position but shorting the futures may sell large amounts of Bitcoins as the expiration date approaches to minimize tracking error. Then the investor may sell all of their remaining Bitcoin, and if it’s a large enough sell it could cause the market to drop, which would increase the investor’s profits from their short position.

Bitcoin has billions of USD of trading volume per day, so it seems unlikely that investors trying to make profits shorting the futures markets would have enough money to drop global Bitcoin price. In any case, the Commodities Futures Trading Commission is investigating Bitcoin exchanges to see if any price manipulation related to futures trading has been occurring.

President and chief operating officer of CBOE Global Markets, Chris Concannon, says that the fall of Bitcoin’s price can be more easily explained by bad news and that the CBOE futures don’t have as much influence on the global Bitcoin market as Lee is saying.

 

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Moody’s, Fitch, S&P: Bitcoin Futures Considered Risky

The top three credit rating agencies, S&P, Moody’s and Fitch, said they consider Bitcoins future exchanges to be risky business, and that banks which clear Bitcoin futures contracts could have their credit rating downgraded if Bitcoin futures trading volume continues to grow.

The credit rating agencies assign letter grades to banks, corporations, and governments to indicate how likely they are to default on debts. The lower a grade a bank has, the harder and more expensive it is for them to obtain loans, limiting the amount of credit they can extend to clients.

Moody’s says Bitcoin futures contract clearing is considered credit negative since it exposes the bank to the volatile Bitcoin market, whether they are directly handling cryptocurrency or not. Volume is not enough to cause a credit rating decrease at this time, but if volume increases enough that will cause an increase of risk that will force agencies to assign a lower grade.

A Bitcoin futures contract is an agreement to buy or sell Bitcoin at a pre-determined price at a specific time in the future. This can be used by traders to manage their risk, since if the market drops they could sell their Bitcoins at a higher fixed rate that was agreed on in the futures contract regardless of how far the market drops.

This mechanism that can help manage risk can be used to profit from shorting the Bitcoin market too. The Bitcoin market has been in a sharp decline since futures contracts launched, making shorting quite profitable, to the point that a federal investigation has been opened up by the Commodities Futures Trading Commission to determine if futures trading has led to manipulation of the Bitcoin market. The initiation of the federal investigation and this announcement from the credit rating agencies regarding Bitcoin futures might be related.

Bitcoin futures contracts were officially launched in December 2017 and are now traded on the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE).  Trading volume of Bitcoin futures contracts has been increasing, with a record USD 670 million of daily volume on 25 April 2018. Futures are primarily traded by institutional investors, so increasing futures volume is a positive sign that institutional investors are putting more money into Bitcoin.

Bitcoin futures contracts are cleared by Options Clearing Corporation for CBOE and Clearport for CME, so this statement from the credit rating agencies is directed at these institutions, but also applies to any institutions that decide to facilitate clearing of Bitcoin futures contracts in the future.

 

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