The U.S. Commodity Futures Trading Commission (CFTC) has approved LedgerX’s application for a temporary registration as a swap execution facility. LedgerX plans to list and clear fully-collateralized, settled options on bitcoin. The next step for the commission is to review the application for full registration.
The CFTC approved temporary registration following a comment period from Dec. 15, 2014 to Jan. 30, 2015. The comments are available on the CFTC website. Comments from bitcoin industry players supported approval of the application. Some comments raised concerns.
Mondo Visione, a London, U.K.-based news source for currency traders, noted that LedgerX would be the first regulated venue where institutional investors could obtain bitcoin and use an order book trading mechanism, tailored for institutional trading.
Tony Gallippi, founder and CEO of BitPay Inc., encouraged CFTC to approve LedgerX to clear asset-settled bitcoin derivatives contracts. “We have spent much time with the team from LedgerX and found them to be extremely knowledgeable and capable of building a reliable and transparent market for bitcoin options,” Gallippi wrote.
We hope the CFTC will approve LedgerX to clear asset-settled bitcoin derivatives contracts. These asset-settled options will help reduce volatility risk in our business, as we are holding the underlying bitcoin asset.
Gallippi further noted that it is important for the U.S. to take a leadership position in the liquidity and trading of bitcoin and bitcoin derivatives. “Bitcoin by its nature is global, and can be used anywhere in the world where there is internet access,” he stated.
In the 1990s the United States took an early leadership position in internet access and availability. We believe the CFTC should provide regulatory oversight, encourage transparency, and allow the creation of a robust derivatives market for bitcoin.
Joshua Lim, head of treasury and trading operations at Circle Internet Financial Inc., also wrote in support of LedgerX. He said LedgerX can use new technologies “to disrupt legacy financial infrastructure by eliminating frictions and intermediaries that stand between institutional market participants who need to hedge risk and the marketplaces where such risk exchanges occur.”
“LedgerX is aiming to create a derivatives exchange and clearing organization that is trusted, safe, transparent and regulated,” Lim noted.
Such a platform would benefit not only Circle in the applications above but also many other natural long and short hedgers in the broader Bitcoin ecosystem from miners, merchant processors and remittance companies to consumer on-ramps and investment firms. Furthermore, U.S.-based digital currency firms will be in a better position to drive further innovation in this emerging technology with access to a liquid and transparent domestic platform operating under a clearly defined U.S regulatory framework led by the CFTC.
I. Michael Greenberger, a law professor at the University of Maryland, commented that development of a regulated market and clearinghouse for virtual currency hedging would accelerate its use by financial markets and help the growth of the sector. However, Greenberger also said LedgerX’s proposal has “untried elements, deviates from core principles applicable to the proposed registrants and generally raises issues of significant concern.”
The commission should not rush to promote the establishment of a regulated virtual currency derivatives market, he said. “Instead, the Commission should encourage a new trading and clearing ventures, including LedgerX, to develop structures that comply fully with, or otherwise reliably satisfy the policy objectives” of the Commission.
The LedgerX management team comprises Goldman Sachs, MIT and CFTC alumni.
Paul L. Chou, co-founder and CEO, previously co-founded and ran Opez, a software company which received funding from the Y Combinator program, a startup accelerator fund which has sponsored Dropbox, Reddit and Airbnb.
Juthica Chou, co-founder, president and chief risk officer, worked seven years as a derivatives trader within the securities division of Goldman Sachs, specializing in algorithmic trading.
Zach Dexter, co-founder and chief technology officer, is an experienced software engineer, project manager and technology architect.
The board of directors includes Jim Newsome, former chairman of the CFTC and former CEO of NYMEX, and Tom Lewis, former CEO of Ameritrade and former CEO of Green Exchange.
Company investors include Google Ventures and Lightspeed Venture Partners.
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