Bitcoin Futures May Be Coming, But a Bitcoin ETF Is No Lock
CME Group's decision to create a bitcoin-futures contract could pave the way for a bitcoin-based exchange-traded fund, but it is no sure thing.
On Tuesday, the operator of the Chicago Mercantile Exchange and other futures markets announced plans to launch a contract based on bitcoin by the end of the year, pending regulatory approval.
It would be a significant development for the digital currency, for the first time giving Wall Street traders a straightforward way to bet on bitcoin's price, both up and down. Futures also offer a way for market participants to protect themselves against the currency's notorious price swings.
Some say a vibrant futures market in bitcoin could also open up a new path for the Securities and Exchange Commission to approve a bitcoin-based ETF, and some ETF players have looked at basing their product off a bitcoin futures contract.
"This definitely is a positive development," said Dimitri Nemirovsky, a founder at SolidX Management LLC, which had proposed one of the bitcoin ETFs that the SEC rejected earlier this year. "A bitcoin futures contract listed on a major exchange like CME directly addresses one of the concerns the SEC staff identified in their disapproval notice for our fund."
Still, the existence of a futures contract alone likely wouldn't be enough for the commission to change its mind. The wording of the SEC decision referred to "well-established, significant, regulated markets." That suggests that the SEC would require not just the existence of a futures contract, but enough trading history for it to constitute a liquid, transparent market.
Unlike commodities that have become the basis for popular futures contracts and ETFs, bitcoin is only eight years old. The digital currency created by an anonymous founder isn't backed by any sovereign nation, but exists on a network of interconnected computers. Its central feature is an open ledger of transactions that results in a public record that can't be altered.
Since its launch in 2009, bitcoin has been a source of both controversy and viral growth, associated with both illicit dark-web activities like ransomware and money laundering, as well as the Silicon Valley startup scene.
In March, the SEC rejected two of the proposed ETFs, one from the brothers Cameron and Tyler Winklevoss, and a second from SolidX.
The SEC's main objection was that bitcoin trading was too opaque and that market manipulation would be undetectable. The commission was concerned that most bitcoin trading was done on unregulated exchanges outside the U.S. Because of that, the U.S. exchanges that would have listed and traded the bitcoin ETFs -- the New York Stock Exchange for SolidX and the renamed Cboe BZX U.S. Equities Exchange for the Winklevoss Bitcoin Trust -- wouldn't be able to enter into surveillance-sharing agreements that would allow them to guard against market manipulation.
The commission wrote in its rejection of the SolidX proposal in March that for previously approved ETFs "there have been in every case well-established, significant, regulated markets for trading futures on the underlying commodity."
In its announcement Tuesday, CME essentially said it is comfortable dealing with bitcoin exchanges that the SEC largely is nervous about. Its futures contract will be based on pricing data from four existing bitcoin exchanges, Bitstamp, GDAX, itBit and Kraken.
The SEC on Wednesday declined to comment. The Winklevoss brothers were unavailable to comment.
A third ETF, the Bitcoin Investment Trust from Grayscale Investments, trades as an over-the-counter product. The firm had applied to have it listed as a fully regulated ETF, but withdrew that application in October before the Commission ruled on it. Grayscale declined to comment on Wednesday.
The Bitcoin Investment Trust has risen sharply this year as the price of bitcoin has surged. Recently at $828 per share, it is up 581% this year. Bitcoin traded as high as $6,629 on Wednesday, another record high. It is up roughly 580% this year.
--Alexander Osipovich contributed to this article.
(END) Dow Jones Newswires
November 01, 2017 18:55 ET (22:55 GMT)