By Rob Daly

CFTC Approves Bitcoin Clearing

The US Commodity Futures and Trading Commission has removed the final obstacle for institutional investors to buy, sell, and hedge Bitcoin positions.

The regulator has approved LedgerX’s request for registration as a become derivatives clearing organization only a few weeks after it okayed the company’s registration as a swaps execution facility.

Before LedgerX can commence trading its physically settled one- to six-month European-exercised options on bitcoins, the SEF operator will need further CFTC approval.

“To list individual contracts we put together the specifications and give them to the CFTC to make sure they are comfortable with the details,” Paul Chou, co-founder and CEO of LedgerX told Markets Media. “In our case, we will wait to certify our contracts closer to our official launch, expected to be in the early fall.”

Unlike other derivatives contracts made available to trade on other SEFs, the Bitcoin options contracts will trade only on LedgerX since the company will also clear the contracts.

“The raison d’être for our DCO is that we saw a need for a clearinghouse since we did see any clearinghouse with the expertise to store securely what effectively is an electronic bearer asset,” said Chou.

The new clearinghouse will be fully collateralized, which will prevent members from selling naked calls and will be obligated to settle on a T+1 basis. But in practice, settlement likely will happen on trade date, he said.

LedgerX developed almost all of its hardware, software, and firmware internally and does not rely on third-party vendors to provide digital wallets to store clients digital assets.

“The hardware that we use is military grade encryption hardware sold by defense contractors,” said Chou. “The equipment is so sensitive that it comes with an export license where you cannot export ship it out of the country without special permission.”

LedgerX may introduce some amount of margin, which would require the creation of a default fund, as it expands the number of offerings in the future.

In the meantime, the clearinghouse has an insurance policy that covers the value loss in the unlikely event of a systems failure, said Chou.

Related articles

  1. The Bitcoin ETN futures are based on ETC Group’s physical Bitcoin ETN.

  2. Gensler suggests Bitcoin ETF filings limited to CME-traded futures would be welcomed by SEC.

  3. It is hoped that BNY Mellon will provide transfer agency and ETF services when the fund converts to an ETF.

  4. Increase in institutional demand highlights growing legitimation of bitcoin.

  5. There has been more institutional volume than anticipated.