First DCO, Then ETF

Congratulations to Paul and Juthica at LedgerX for reaching the promised land!

There are 16 registered Derivatives Clearing Organisations (DCO) in America. This week the CFTC approved LedgerX’s application to become the 17th active DCO. LedgerX specifically focuses on Bitcoin related derivatives. This is a monumental shift in attitude of US regulators towards Bitcoin and the digital currency industry as a whole.

The CFTC deems LedgerX capable of safely storing significant amounts of Bitcoin on behalf of exchange members. One of the biggest concerns that any regulator has is how a regulated entity will handle Bitcoin storage. The various exchange hacks over the years proves that Bitcoin custody is a dangerous endeavour. Should this happen, the loss of face will surely end the career of the bureaucrat in charge.

Only large trading accounts can become authorised participants on LedgerX. To trade on LedgerX, participants must have several millions of dollars in cash. That restricts the universe of traders to large financial institutions. The popularity of the exchange come launch will provide clues as to the appetite of banks and large trading houses towards Bitcoin.

The regulatory stamp of approval does not mean LedgerX won’t get hacked; it provides convenient cover in case they do. If a financial institution trades on LedgerX and Bitcoins are lost, they can wash their hands of the loss because they traded with a regulated institution.

CFTC raises one Bitcoin DCO, action to the SEC

If the CFTC is looking towards the future of finance, what conversations are big dogs at the SEC having? Can they sit back and continue to deny applications for ETFs? They can’t claim Bitcoin is unsafe, for their sister regulator body has deemed them so. They can’t claim that Bitcoin provenance presents an issue for a retail traded product, for a regulated DCO holds Bitcoin.

It is naive to assume the CFTC and SEC heads do not break bread. Traditional equity, fixed income, and commodity listed products’ trading volumes are declining. Banks’ quarterly earnings reports point to a secular decline in equity, fixed income, and commodity trading volumes. As I have repeatedly said, Bitcoin and digital currency trading represents the fastest growing fee pool globally.

The regulatory bodies are slaves of the TBTF financial institutions. One way or another they will earn fees from digital currency trading. The disdain previously shown by bank chieftains is purely for public consumption.

2017 proves without a doubt that facilitating trading and providing financial services for digital currencies is a viable long term business. Hundreds of millions of dollars in fees earned on an industry with a sub-$100B market cap is truly astounding. The demand for a subset of non-correlated assets will force banks to play ball.

Mere retail mortals cannot trade on LedgerX. However, we should be excited for the messiah, an ETF. The SEC cannot continue to be a prude rose. I predict that one or more applications for an ETF will be approved within the next 18 months.