CFTC: LedgerX 'Not Approved' to Launch 'Physical' Bitcoin Futures

UPDATE 13:40 UTC: In a statement received by CoinDesk Thursday, the U.S. Commodity Futures Trading Commission (CFTC) says LedgerX has "not yet been approved by the Commission" to offer physically settled bitcoin futures, contradicting the company's claims.

Since the CFTC's statement, LedgerX officials have acknowledged that the previously announced futures did not launch. More details can be found here.

The Takeaway

• Bitcoin derivatives provider LedgerX announced it has launched the first physically-settled bitcoin futures contracts in the U.S. Wednesday.
• The contracts, which pay traders out in bitcoin, rather than U.S. dollars, will be available to both institutional and retail investors.
• Customers can deposit bitcoin, rather than dollars, when buying a contract.
• LedgerX has beaten the Intercontinental Exchange’s Bakkt and TD Ameritrade-backed ErisX to the punch with its new offering.

Any U.S. resident with a government-issued I.D. can now trade futures contracts for real bitcoin.

Revealed exclusively to CoinDesk, LedgerX has officially launched the first physically-settled bitcoin futures contracts in the U.S., beating the Intercontinental Exchange’s Bakkt and TD Ameritrade-backed ErisX to the punch.

Perhaps more importantly, LedgerX is offering the new product to both institutional and retail investors, allowing anyone who can pass know-your-customer (KYC) processes to trade the contracts, not just institutional clients with millions in assets.

LedgerX CEO Paul Chou told CoinDesk that retail customers can trade the product using his company’s new Omni platform, which recently went live, while institutional clients can trade futures as with any of LedgerX’s other products.

While LedgerX is not the first bitcoin futures provider in the U.S., it is the first to offer physical futures, meaning customers receive the actual bitcoin they bet on when the contracts expire, rather than the cash equivalent.

Moreover, customers don’t need to put U.S. dollars in to bet on the product. Chou explained that traders can buy contracts using bitcoin.

“Not only are they delivered physically in the sense that our customers can get bitcoin after the futures expires, but also they can deposit bitcoin to trade in the first place,” he said. “Cash-settled is cash-in and cash-out, we’re bitcoin-in and bitcoin-out.”

He believes this is the first time that a regulated company is able to allow customers to deposit bitcoin as collateral for a contract.

Because of this, customers do not need to wait for bank transfers or on other limitations of the U.S. banking system to participate, he said.

“If you imagine somebody that deposits bitcoin, they would not have to use the U.S. banking system at all. That’s why physically-settled is very important,” he said. “I think [it’s] one of the most unique use cases for bitcoin, where you’re using cryptocurrencies as the only collateral.”

This is possible using the physically-settled contract, he said, adding:

“As a digital commodity, bitcoin trades 24/7/365 and our customers expect that from us, so if you trade Sunday night, the banking system did not have to be open.”

Opening retail

LedgerX

revealed that it was looking to offer bitcoin futures in April, having filed with the U.S. Commodity Futures Trading Commission (CFTC) for the requisite licenses in November 2018.

The CFTC granted LedgerX a designated contract markets (DCM) license last month, giving the platform the final approval it needed (the company previously had derivatives clearing organization and swaps execution facility approvals through the CFTC).

The company, though formed in 2014, only began offering physically-settled bitcoin derivatives products in 2017. However, its options and swaps products have initially been geared toward institutional customers.

Since then, the company has been working to ensure that anybody could trade its products, Chou said.

“We’ve been involved in this business for the last six years and we have not only been getting institutions on board but we’ve spent a lot of time educating regulators on why this is important,” he said, adding:

“Cryptocurrencies are for everybody and we never started this looking to offer just to hedge funds or institutional clients.”

John Todaro, director of research at TradeBlock, told CoinDesk that physically-settled contracts allow traders to more appropriately hedge their bets, which may be beneficial for non-speculative institutions.

“Additionally, cash-settled futures contracts could potentially be more susceptible to manipulation depending on the formula, and underlying spot exchanges or indices used for settlement at expiry,” he said.

Normally, cash-settled contracts are also cheaper than physically-settled ones, as traditional commodities have delivery costs associated with them. These delivery costs likely disappear with digital assets, however, Todaro added.

“Given cash contracts are more simple relative to physical contracts, physical contracts would likely be more useful for an institution than retail,” he said.

Competitive market

Bitcoin futures have drawn attention in the U.S. since at least 2017, when CME and Cboe announced they were launching cash-settled contracts. While Cboe ended support for its product earlier this year, CME continues to enjoy sizeable trading volume.

TD Ameritrade, the giant online stock brokerage, also offers its clients access to CME’s futures contracts.

However, LedgerX is not necessarily competing with cash contracts, Chou said. For one thing, the two types of contracts “are entirely different.”

“Really we have a lot of folks who never even touch U.S. dollars,” he said. “Cash-settled is very different from what we do.”

This applies to Omni as well, he said. The platform “is really going to be a new product for retail that is going to be unique in that it’s going to be incredibly simple.”

He added:

“It’s going to make available to the retail public all sorts of ability to trade bitcoin, whether it’s spot, futures, options and we have a lot of things in the pipeline.”

(Unlike futures, swaps are not based on the asset itself, but rather its performance, while options are a non-binding contract.)

LedgerX is in good company. A number of companies are planning on offering physically-settled bitcoin futures in the U.S.

Bakkt, which was set up by the New York Stock Exchange’s parent firm to much acclaim last year and TD Ameritrade-backed ErisX have both announced their intention to enter the market.

Bakkt has self-certified its contracts through the CFTC, and is now waiting on a trust charter from the New York Department of Financial Services to set up its warehouse. Once the trust charter is approved, Bakkt will likely be able to launch within a few weeks.

The firm conducted user acceptance testing on July 22, ensuring that customers, clearing members and the provider were all able to communicate when trialing the contracts.

ErisX, like LedgerX, has received the necessary CFTC approvals, though it has not announced a timeline for launching its futures contracts. The company began offering a cryptocurrency spot trading market in April 2019.

LedgerX team image courtesy LedgerX