One of the biggest stock exchange in US is apparently planning to list bitcoin futures in the first quarter of 2019 according to Bloomberg’s unnamed sources.
They say they’ve been working with the Commodity Futures Trading Commission (CFTC) before launching the bitcoin futures which appear to be similar to CME’s and CBOE’s, meaning they’re probably cash settled.
Cash futures have been criticized for effectively being “fake” futures as they don’t necessarily touch the underlying asset. Unlike Exchange Traded Funds (ETFs), which give you a fairly direct way of owning a bitcoin.
No bitcoin or crypto ETF has been approved in US or any other jurisdiction. Jay Clayton, chairman of the Securities and Exchanges Commission (SEC), suggested in a softball interview that a bitcoin ETF is currently unlikely.
Clayton said that investors expect the underlying asset of the ETF to not be subject to significant price manipulation and another concern was custody.
Asked what’s the difference between price manipulation and volatility with the Dotcom stocks’ plunge used as an example which would have given great returns even if they were bought at the top, Clayton said:
“Those stocks traded on exchanges where there were rules, surveillance, designed to prevent manipulative techniques, such as the two of us agreeing to sales at high prices in order to drive the price up so that we can then sell our securities when others jump in.
Those kinds of safeguards do not exist currently in all of the exchange venues where digital currencies trade.”
He then qualified it to say many of the markets where digital currencies trade rather than all exchanges with SEC previously suggesting there needs to be significant trading volumes in surveilled exchange so that price manipulation wouldn’t be possible without manipulating it on the surveilled exchanges as well.
Custody is kind of a new one. Clayton said they wanted to ensure investors do not take any additional risks, such as theft of the underlying asset, but only the risk of the underlying asset’s price movements.
What that means exactly is not very clear because gold can be stolen, although not very easily. A business might experience a fire or some other event that effectively makes it bankrupt instantly. So there’s always additional risk with any investment, business or asset.
The answer to it is obviously insurance. Some of the ETF applicants have claimed they are insured, so the main issue appears to be price manipulation or more correctly the potential of price manipulation.
As we’ve seen with Libor and the rest, manipulation does occur at a grand scale even in highly regulated markets. The difference here is that there isn’t just one exchange that trades bitcoin, like with stocks. Instead, there are hundreds if not more across the globe.
For a stock, the two of us can paint the tape as there’s only one tape. For cryptos, you need to paint hundreds of tapes. You can argue arbitrage bots try to keep all the tapes close to one, but only to some extent.
That does not appear to be a satisfactory answer for SEC which effectively wants the majority of trading to occur on traditional exchanges, like Nasdaq.
From many points of concern, however, this has now reduced to just one provided the ETF has insurance. With CME, CBOE, Nasdaq and even NYSE now launching bitcoin products, that too might be addressed.
Some of these products launch next year, so there’s that magic number again of 2020. By then, we might perhaps have the world’s first crypto or bitcoin ETF.