As the price of Bitcoin is reaching to its former glory, more companies are trying to get in the crypto space with more traditional products. It is not the first time a company has come forward with the idea of issuing future contracts, but this time a Chicago based company has an interesting proposition. trueDigital Holdings plans to list physically-deliverable Bitcoin derivatives for institutional investors. The company has already applied for the necessary license with the CFTC and is awaiting approval.
Before this, the Chicago-based crypto exchange ErisX had procured a Derivatives Clearing Organization (DCO) license from the United States Commodity Futures Trading Commission (CFTC). ErisX is planning to make digital asset futures contracts available for trade on its regulated derivatives market later this year via its new DCO. ErisX also launched its spot market in April, with the promise of eventually rolling out a single digital asset platform for spot and futures trading.
ECP and non-ECP
Most entities involved in crypto does not fall under the ECP category of Commodity Futures Trading Commission (CFTC). An Eligible Contract Participant (ECP) is an entity that is classified by the Commodity Exchange Act (CEA) based on its regulated status or amount of assets. There are 11 types of entities eligible for being an ECP. There are also some criteria used to give ECP status. The definition of “Eligible Contract Participant” (ECP) is found in Section 1a(18) of the CEA (7 U.S.C. § 1a(18)). ECP classification permits people to engage in transactions (such as trading on a derivatives transaction execution facility) generally unavailable to non-eligible contract participants.
The Dodd-Frank Act makes it unlawful for a person who is not an ECP to enter into a swap other than on or subject to the rules of a designated contract market (DCM). This means that non-ECP entities are forced to apply for two kinds of license/status:-
- Swap dealers (SDs) and MSPs as ECPs under the CEA, whether or not they would otherwise qualify, making them eligible to enter into swaps off-exchange.
- SBSDs and MSBSPs as ECPs under the Exchange Act, whether or not they would otherwise qualify.
And hence both trueDigital and ErisX had to get SD status before applying for both designated contract market (DCM) and swaps execution facility (SEF).
trueDigital as of now has decided to apply for Designated Contract Market (DCM) and Swaps Execution Facility registrations of United States Commodity Futures Trading Commission (CFTC) in order to form a regulated exchange named trueEX LLC. The request is still pending approval from the CFTC, the firm has clarified. trueDigital aims to become one of the very few entities offering regulated crypto derivatives in the U.S and has a plan to compete with the existing bitcoin futures providers.
Whether the application for a license for such an initiative will be given, is to be seen due to the upcoming regulatory changes. In the past, US regulators have not shied away from not issuing a license to many crypto related initiatives, including many Bitcoin-based ETFs which sparked a huge debate. Whether this proposal gets approval or not, one thing is clear. As crypto slowly gains momentum more and more companies will try to get a piece of it. For an industry which has been trying to undo the injustices of the current financial system, the bigger question should be if crypto needs futures, options, and such financial products.