“The times are a changin”, stealing the lyrics from the famous singer/songwriter Bob Dylan, which perfectly describes the fast-changing Bitcoin space lately. The CFTC has just given the provider, ErisX, the green light to offer a new bitcoin futures contract. ErisX is backed up the well known and widely used US brokerage called Ameritrade. Their newly acquired license, called the “Deriviates Clearing Organization”(DCO) license will enable the company to launch Bitcoin futures in compliance with US regulations. This is the second such approval of a Bitcoin settled Futures exchange this year with LedgerX also gaining their approval only a week ago.
Futures Definition: “Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. Here, the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date. Underlying assets include physical commodities or other financial instruments. Futures contracts detail the quantity of the underlying asset and are standardized to facilitate trading on a futures exchange. Futures can be used for hedging or trade speculation.”(Source: Investopedia)
Bitcoin Settled Futures vs Cash Settled Futures
The CBOE and CME groups both launch Bitcoin futures contracts in late 2017 with the later still offering them. They differ from the Bitcoin settled futures in that they are actually settled in US Dollars (cash-settled) instead of Bitcoin. This means that CME will settle at expiry, the difference in the price of the underlying asset (Bitcoin) but in cash, whereas ErisX and LegderX will settle the trader in real Bitcoin. This will require the company to hold Bitcoin, having custody of the Bitcoin in itself bring a whole set of challenges, so far their plan seems to have been given the nod by the CFTC, a positive sign for the industry as a whole. Many also speculate that having a Bitcoin settled future will have a positive effect on the price, due to the fact that the exchange will need to house real Bitcoin, removing supply from circulation.
Will we see a Bitcoin ETF SEC approval soon?
The ETF applications of 2017 and 2018 still remain fresh in the community’s minds, as well as the subsequent disappointment on each decline, however, the approval of the CFTC Bitcoin settled futures may be the early etchings of what could lead to the holy grail, a Bitcoin ETF approval.
One of the reasons cited by the SEC for declining previous ETF applications was the issue of custody. Since then there were several entrants to market each offering Bank-grade Bitcoin custody solutions. the recently approved ErisX will likely be using one of these solutions, adding confidence that the SEC may now be satisfied on future ETF applications. Another reason the SEC has held off from issuing the ETF license is that man of the exchanges that will be used for pricing are based outside of their jurisdiction and as such, they are not able to monitor or verify the activities. Having these new products go live later this year will give the SEC the opportunity to see them live in action and may further bolster the chances of a Bitcoin ETF.
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