Earlier this week, United States-regulated crypto derivatives and clearing platform LedgerX was reported to launch the first physically settled Bitcoin futures contracts in the country, therefore stealing a march on Bakkt and ErisX. However, the Commodities Futures Trading Commission (CFTC) soon refuted that information by stating that the exchange has not yet been properly cleared by the agency.
Now, a LedgerX official has told Cointelegraph that the media publication that broke the news — CoinDesk — had “misunderstood the scope of the launch,” which in turn led to the confusing publication. Meanwhile, the exchange’s CEO is threatening to sue the CFTC on social media while his company offers no comment on that. Cointelegraph has also reached out to CoinDesk regarding the comment obtained from LedgerX, and was referred to a follow-up article that explained the situation from its point of view.
LedgerX’s Omni platform: options and swaps, but no futures yet
On July 31, CoinDesk reported that LedgerX had officially launched the first physically settled Bitcoin futures in the U.S., citing information “revealed exclusively to CoinDesk.” On the same day, LedgerX announced the launch of its Omni trading platform, which, according to the company’s website, allows retail customers to “trade bitcoin, bitcoin options, and futures.” Trading on Omni is open only to U.S. and Singapore customers, subject to a minimum deposit of $10,000 or 1 BTC (which, at press time, is around $11,600). The since-deleted tweet read, without explicitly mentioning Bitcoin futures:
“It's official: we're live with retail trading on Omni! If you signed up for our waitlist, you'll hear from us soon.”
On Aug. 1, LedgerX posted a new tweet, clarifying that only spot and options trading are currently available on Omni, while the futures are “coming soon”:
“It’s official: we’re live with retail trading on Omni! Bitcoin spot and options trading is now available to everyone (futures coming soon @CFTC)! Thanks to everyone who signed up for our waitlist, you'll be hearing from us soon.”
Now, the company claims that CoinDesk misinterpreted the exclusive information that LedgerX allegedly shared with the media in a phone call prior to Omni’s launch. “We launched Omni, they just misunderstood the scope of the launch,” LedgerX's chief operating officer, Juthica Chou, told Cointelegraph in an email, clarifying:
“We launched our DCM (designated contract market) which allows retail + options + swaps + futures. We launched it with just retail + options + swaps, though it got picked up as being launched with futures.”
Indeed, in June this year, the CFTC officially approved LedgerX’s application for designation as a contract market. Thus, effective June 24, 2019, LedgerX has been registered as a designated contract market (DCM). However, the platform still has to receive an amendment to its derivatives clearing organization (DCO) license in order to proceed with the futures launch, as the CFTC noted in the press release:
“LedgerX has requested that the CFTC amend its order of registration as a DCO, which limits LedgerX to clearing swaps, to allow it to clear futures listed on its DCM.”
As CoinDesk reported in a separate article, LedgerX decided to launch BTC futures regardless, since the deadline for its amendment had allegedly passed (per CFTC regulations, the regulator has 180 days to approve or deny a DCO application).
“We submitted the amendment on Nov. 8, 2018, it’s been more than 180 days, we don’t know why that’s the case [that it has not been approved],” Juthica Chou is quoted saying in the CoinDesk report. That led the company to believe that it was clear to continue with the launch, the article suggested. However, LedgerX still needs explicit approval from the financial watchdog to launch BTC futures, the CoinDesk report continued, quoting an unidentified “senior” CFTC official:
“Every new or amended DCO application needs to be affirmatively approved by the Commission. […] The absence of a decision does not constitute approval, and entity self-certification is not an option.”
Another cryptocurrency news outlet, The Block, also quoted a CFTC spokesperson saying that LedgerX does not have the necessary DCO license to trade futures, as it currently only permits the clearing of swaps, not futures. “We have a ton of retail demand for our current product offerings and will add futures when we get the DCO amendment for clearing,” Juthica Chou confirmed to Cointelegraph, adding:
“We've been in constant contact with CFTC. We have three licenses right now, a SEF which allows us to list options & swaps, a DCM which allows us to list options, swaps & futures, and a DCO which allows us to clear options & swaps. We are awaiting a DCO amendment so we can clear options, swaps & futures.”
Additional reaction: LedgerX’s PR firm drops its client, CEO says the company is considering suing CFTC
After it became clear LedgerX has not launched BTC futures, Ryan Gorman, founder of communications agency RGPR, which the clearing platform was apparently a client of, tweeted that his firm has terminated its relationship with LedgerX “due to concerns over the events of the past 24 hours.” RGPR has not responded to Cointelegraph’s request to offer an additional statement. LedgerX was still listed among clients on the company’s website as of press time.
Moreover, once the aforementioned CoinDesk article went live, LedgerX CEO Paul Chou took to the Twitter comments section to announce that his firm is considering taking legal action against the CFTC for “anti-competitive behavior,” “breach of duty,” and “going against the regs,” among other reasons.
“If the government does not do the right thing, we will sue them, period,” Chou added. “Already talking to our lawyers about this.” LedgerX has repeatedly ignored Cointelegraph’s questions regarding the CEO’s tweets, despite addressing other inquiries. Nevertheless, Chou’s tweets have struck a responsive chord among community members like Michael Poutre, a managing partner at Terraform Capital, who told Cointelegraph of his own experience dealing with U.S. regulators:
“We have seen first hand how the US Government has not only acted slowly, but has been harmful to businesses in the US that have proactively worked with the government to help them understand, be informed and responsible in their blockchain/crypto facing activities and regulations.
When I was running The Crypto Company, we found out our stock had been halted from CNBC. The SEC never called us, never asked us for documents, and would not return our calls for almost 5 months, and when we did speak with someone, they had little to know clue who we were.”
What the fuss is all about? The importance of physical BTC futures
Essentially, futures act as an agreement to buy or sell an asset on a specific future date at a specific price — and hence represent a risk management tool that might be particularly useful in volatile markets such as crypto. It is not an entirely new concept for digital currencies, however — BTC futures have been traded on two major U.S.-regulated exchanges, the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE), since December 2017.
The distinctive feature of physically settled BTC futures, in turn, is that once the contracts expire, customers receive BTC tokens as opposed to cash. “If your objective is to lock in the price toward a future purchase of the actual asset, physically-settled BTC futures is the better option,” Martin Weiss and Juan Villaverde of Weiss Ratings explained to Cointelegraph in an email. “You buy the contract by making a deposit. Upon expiration, you pay the balance and receive the actual Bitcoin tokens.” In contrast, if the contract is settled in cash, the process is much more complicated, Weiss and Villaverde added:
“First, even after settlement, you’d need to go to another exchange to purchase the BTC. Second, in the interim, the BTC price you pay could be significantly higher (especially in a volatile bull market). And most important, if you’re a large institutional player investing large amounts, you might not easily secure the desired quantity of BTC. In effect, all this defeats the purpose of buying a futures contract to begin with. Thus, cash-settled contracts are useful mostly for speculators who have no intention of owning the actual asset.”
Indeed, physically delivered futures might contribute to the market’s overall volume, as well as to its overall economy, says Mati Greenspan, a senior market analyst at eToro. He told Cointelegraph:
“Physically settled bitcoin futures would open the door for more participants in the market, especially on an institutional level. This would almost certainly have a significant impact on volume and price.”
Nevertheless, the progress has been extremely slow, and physically settled Bitcoin futures are still not available on the U.S. market, despite being on cards for a number of forthcoming U.S.-regulated exchanges like Bakkt and ErisX.
“Many teams in the space have tried to build regulated offerings and found that the process is extremely slow and cumbersome. ICE [Intercontinental Exchange, the creator of Bakkt] and LedgerX are finding this right now in the US, but the same applies to several other jurisdictions,” Jose Llisterri, co-founder and chief product officer of Interdax, told Cointelegraph, adding:
“The work required to launch these offerings is titanic and will be very positive for the space if they succeed. Although it is far from an easy or fast process, and could even reach a dead-end scenario.”
Thus, LedgerX’s situation seems to illustrate the difficult, intensifying relationship between crypto players and U.S. regulators. Meanwhile, industry participants continue to call legislators for clearer guidelines on U.S. soil and are moving their operations to other jurisdictions due to regulatory gaps.