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The Future of Cryptocurrency Futures Regulation
Traders Magazine Online News, December 7, 2017
Add the chairman of the largest electronic brokerage firm in the U.S. to the list of Cassandras warning us of the perils posed by the trading of cryptocurrencies.
In a remarkable open letter in The Wall Street Journal addressed to J. Christopher Giancarlo, the Chairman of the Commodity Futures Trading Commission, Thomas Peterffy, Chairman of Interactive Brokers, reacted adversely to a proposal by the Chicago Mercantile Exchange to allow Bitcoin and other cryptocurrency derivatives to be cleared in the same clearing organization as other products. The reason? According to Peterffy:
"The risk is so great that “a catastrophe in the cryptocurrency market that destabilizes a clearing organization will destabilize the real economy.” Peterffy’s solution is for the CFTC to require that any clearing organization that wishes to clear cryptocurrencies or their derivatives do so in a wholly separate clearing system which is isolated from the systems for other products."
While the potential for catastrophe may be a bit exaggerated, the solution shouldn’t be easily dismissed. It’s not as if the CFTC has ignored problems projected by trading in cryptocurrencies. Actually, the agency has for years been trying strike a balance between making the public aware of the dangers they pose and not seeming too heavy handed in doing so.
The CFTC’s reach is quite broad. The agency’s regulatory powers extend to exchange actions and the review and approval of futures contracts, and it has the power to issue any rule it finds necessary to accomplish the mission of the Commodity Exchange Act, to foster open, transparent and financially sound markets.2 Before it approves a contract for trading, the CFTC must determine that it is in the public interest by assessing whether its use for price discovery and hedging serve a genuine economic purpose.3 The CFTC also uses its power to prevent fraud and market manipulation to assert jurisdiction over commodity trading in spot markets.
The CFTC took the occasion of a settlement with an unregistered swap execution facility to declare that Bitcoin and other virtual currencies are commodities and subject to regulation as such.4 Only recently, the CFTC circulated a “Primer” on virtual currencies to educate the industry and investing public on their nature and, perhaps most importantly, the risks they pose.5
To date, market commentators, like the CFTC, have focused on a number of valid concerns about cryptocurrencies: They’re a bubble. They pose security risks. They’re a ready vehicle for fraud and money laundering. Peterffy’s point is different: That cryptocurrencies will, in the end, damage clearing and trading firms that deal in the currencies, and even those that don’t, and the exchanges.
It’s a point well taken. Consider this. Futures margin rates range from 2 to 8%. The more aggressive trading firms set their rates at the lower end of the range to attract business. When losses exceed the amount margined, the broker must cover them first and then try to collect from the client.
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