In an interesting press release from The Commodities Futures Trading Commission on July 6, they announced that LedgerX would be granted access as a Swap Execution Facility. Swap Execution Facilities were established under the Dodd-Frank bill of 2010 to ensure the oversight of the derivatives. The announcement comes under section 5h of the Commodity Exchange Act. This approval is a major milestone, but it is not the last one needed to fill all the requirements for compliance. Additionally, LedgerX needs to be approved as a derivative clearing organization under 5b of the Commodity Exchange Act. Once this is completed, LedgerX would be the first federally recognized exchange to trade Bitcoin options. Essentially, this would allow institutional investors to gain exposure into this market, as federal law did not allow it before. This Swap Execution Facility is a rather prestigious group, as LedgerX would now be the 25th entity. They will join Bloomberg and the Chicago Mercantile Exchange, to name a few. The approval process has taken several years, as the exchange did not have enough capital to collateralize its trades. Recent fundraising and capital formation has led to sufficient funds for collateralization.
Although the approval decision was made, it does not come without some speculation of insider influence. Early in 2015, CEO and founder of LedgerX, Paul Chou, was appointed to the CFTC’s technical advisory committee as a Bitcoin trading expert. Essentially, they gave LedgerX unfiltered access to become the 1st exchange to trade Bitcoin options.
This announcement brings several fundamental questions to one’s mind. If Bitcoin’s main attribute is decentralization, why is a derivatives market being created to control the price? Derivatives derive their value from an underlying asset, and in this case, an option to buy or sell Bitcoin at a given point is not something that I want in the hands of Wall Street hedge funds. We know what happens in our controlled markets today, especially in the futures market, where tangible assets are traded via paper contracts daily. Paper trades at many multiples of the actual asset, and it creates incredible distortions. Since Bitcoin is supposed to be decentralized and safe from Orwellian control, I see this development as another paper trading game to control the price. Once institutional investors can invest in this technology, I would expect to see massive amounts of naked shorting to push the price way down. The other side of the argument is that the institutional investors will push the price considerably higher because of their leverage and ability to now buy. I have seen several articles of major hedge funds securing funding to create an all-cryptocurrency fund, and this could be great for appreciation. This development is one of both concern and optimism.
Cheers,
Colin Bennett