The U.S. Commodity Futures Trading Commission (CFTC) announced over the weekend that it has issued a registration order to LedgerX LLC (LedgerX), granting it status with the CFTC as a Swap Execution Facility (SEF). These terms are opaque to most, but they are very important if you trade digital currency. It is important because many US based Funds currently are not able to commit capital without a mountain of paperwork and side pocket deals within the funds. This passage makes it clean, and I fully expect volatility to start to tighten day one when active trading begins.
The trading will happen on a non-traditional exchange (not the CBOE) via LedgerX which is an institutional trading platform who have been patiently waiting for full regulatory approval from the CFTC to trade and clear options on Bitcoin. Many portfolio managers have wanted other vehicles that fit into their offering documents so they can commit capital, and the fact that the larger exchanges were outmaneuvered by and upstart is also a surprise. I think in general the speed with which digital currency is coming into play reflects a softer regulatory environment across all markets. I still do not understand why the SEC declined the Winklevoss ETF. It makes no sense – but the SEC is historically a huge fade – ask Bernie Madoff’s clients.
LedgerX is now the first federally regulated bitcoin options exchange and clearing house which will list and clear fully-collateralized, physically-settled bitcoin options for the institutional market.
Back in May, Ledger Holdings, the parent company of LedgerX, closed $ 11.4 Million in Series B financing. Led by Miami International Holdings Inc. and Huiyin Blockchain Venture Investments, this funding will go to support LedgerX’s plan to develop its regulated exchange and clearing house for bitcoin and other digital currencies.
Just some history, you need to know that on December 16, 2016, Ledger Holdings and Miami International Holdings, Inc. (MIH), announced that MIH had completed an investment in Ledger Holdings. Early investors in Ledger Holdings include Google Ventures and Lightspeed Venture Partners, so these are not neophytes, but historically these have gone to the CME, CBOT or CBOE where they have a pool of liquidity.
It was a bit of luck that the arcane laws related to SEF’s (which are platforms that operate under the CFTC’s regulatory oversight for the trading of swaps), that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 authorized the creation of SEF’s years back. I view this as well thought out on behalf of LedgerX, but I am still flummoxed that the Chicago Mercantile (NYSE:CME) was asleep at the wheel.
What Options Mean for the Market
The conclusion is evident in today’s sell off across the board, and this is a good thing if you want mass adoption of digital currencies. No one needs 150% implied volatility every day, it will keep a huge part of the market away. The introduction of options trading for Bitcoin is the first step in smoothing volatility for all digital currencies. Portfolio managers worldwide applaud the ability to participate in a fun exciting asset class, and they get to do this without asking investors to sign additional paperwork – most of the standard agreements for hedge funds refer to approved CFTC or SEC products which opens the floodgates. Hail Bitcoin Options !! Today is a good day for cryptocurrencies – making positive steps for global adoption.
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