04.23.2019
By Rob Daly

OPINION: Digital Securities Limp Along

In the race for institutional investment dollars, digital derivatives have lapped digital securities and will lap them again by yearend.

DRW Trading CEO Don Wilson estimated that token-based securities were “at least three years away,” during a fireside chat at the Synchronize 2019 conference in lower Manhattan.

Three years, when used in IT estimates, often is shorthand for “I haven’t the foggiest idea, but I’ll give you a number since you asked.”

Wilson’s three-year estimate likely falls into this camp given the minimal guidance that the US Securities and Exchange Commission has offered to potential digital securities issuers over the past few years.

The Commission confirmed that the two most liquid digital currencies, bitcoin and ethereum, were commodities in its view in 2017, but has not issued much additional guidance until recently. At the beginning of April, the Division of Corporation Finance and Valerie Szczepanik, senior advisor for digital assets and innovation issued a framework that helps issuers determine whether their offerings likely would be considered securities by the regulator.

However, the framework’s authors stressed that the framework should not be considered “a rule, regulation, or statement of the Commission” and is not binding on the Division of Corporate Finance or the Commission.

Even if digital securities issuers manage to navigate the framework successfully, the SEC will govern the digital securities as Regulation D or Regulation S private placements that are limited to qualified investors and will prevent typical retail investors from contributing additional liquidity.

The SEC could provide retail investors easy access to digital securities if it approved any of the propose bitcoin-based exchange-traded funds, but that seems a non-starter for the foreseeable future.

Meanwhile, digital futures look to make a strong showing this year despite Cboe Global Markets’ decision not to renew its bitcoin futures contracts in March. At least three venues regulated by the US Commodity Futures Trading Commission look to compete with the CME Group and trade their own bitcoin futures.

Swap-execution facility operator LedgerX reportedly expects to start trading bitcoin futures on the CFTC approves its request for direct contract market status, which it filed earlier this month.

Existing DCM ErisX, which was the Eris Exchange before its rebranding, plans to launch trading in bitcoin futures as well as spot trading in bitcoin, ethereum, and litecoin in the second half of the year pending CFTC approval.

The Intercontinental Exchange’s Bakkt startup wants to trade bitcoin futures but has put things on hold indefinitely at the end of 2018 due to warehousing issues, according to reports by CoinDesk.

Having all three venues trading by December might be over-optimistic. Having two of them trading futures is likely. Having one of them up and running by yearend is a certainty.

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