It's been over a week since cryptocurrency derivatives began trading in the US market. On October 16, 2017, LedgerX began listing day-ahead swaps and monthly put and call options for bitcoin (BTC/USD) through a "soft launch." During the first week of trading, the platform reportedly completed 176 trades, notionally worth more than $1 million overall. This is a relatively small amount compared to the total bitcoin market cap, which sits slightly above $95 billion as of publication. For comparison's sake, in conventional global markets, options and derivatives trading values somewhere in the trillions – or even quadrillions – of dollars, though it's difficult to quantify because of unlisted over-the-counter (OTC) markets.
For now, LedgerX, which is based in Vail, Colorado, is limited to institutional investors. Retail investors cannot access the platform, and the company has imposed strict eligibility criteria on potential participants.
In order to participate on the LedgerX platform at launch, Participants must currently:
- Be an Eligible Contract Participant as defined by the CEA [Commodity Exchange Act]
- Be US-based and US-banked
- If an entity, have two representatives for authorization purposes
It will be interesting to see if any investors encounter obstacles from the banking industry, but it's too early to tell.
LedgerX's Eligible Contract Participant Criteria can be met through several categories. These include:
- Financial Institution (e.g., Broker Dealer, FCM) or Investment Company that is currently subject to regulation
- Hedging entity with assets exceeding $1mm
- Non-hedging entity with assets exceeding $10mm
- Hedging individual with assets exceeding $5mm
- Non-hedging individual with assets exceeding $10mm
Full criteria are available through Code of Federal Regulations, Title 17 – Commodity and Securities Exchanges, Chapter I, Part I, Section 1.3, section (m).
Stakeholders will also be interested in LedgerX's fee schedule. For options, execution fees are $2.50 per contract or 0.25 percent of strike price per contract. When participants exercise options, they will be charged 25 cents per contract that is exercised. For day-ahead swaps, each transaction participant will be charged an execution fee of 99 cents per contract. General fees include a $10 fee per USD withdrawal and a 0.002 BTC fee for BTC-denominated withdrawals.
While the global cryptocurrency markets never close, LedgerX does not operate 24/7. The exchange recognizes standard bank holidays and its hours will be 9:30 a.m. to 4:00 p.m. EST, Monday through Friday. Trade reporting data is available here.
On October 24, 2017, LedgerX published a policy framework for hard forks, a cryptocurrency-specific issue that could wreak havoc on time-sensitive financial instruments. "Our management and risk committees will evaluate each hard fork on a case by case basis," wrote LedgerX. "We will then publish public notices to our members as to our plan for that hard fork as soon as prudently possible." Marketplace support, feasibility and security, and regulatory approval will all help determine the company's policy toward individual hard forks.
In July 2017, the Commodity Futures Trading Commission (CFTC) licensed LedgerX as a swap execution facility (SEF) and derivatives clearing organization (DCO). One week ago, LabCFTC – the FinTech innovation segment of the CFTC – issued a primer on virtual currency as an educational tool (not official policy). Most recently, CFTC Commissioner Brian Quintenz spoke at Georgetown University's first annual FinTech week, where he suggested that tokens might "transform" at some point from securities into commodities.
The Chicago Board Options Exchange (CBOE) has also expressed interest in offering cryptocurrency derivatives. Pending CFTC review, the CBOE and Gemini plan to offer cash-settled bitcoin futures on the CBOE Futures Exchange in the fourth quarter of 2017, but the launch may not occur until the first quarter of 2018.