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The Capital

Bitcoin Futures Contracts Paying Out in Bitcoin? What will they think of next!

If like me you’ve been monitoring the cryptocurrency markets, you would no doubt have noticed the slight bump in dollar-valuations of the digital assets in the last few days. Whether it’s the thawing of the crypto-winter, a sign of a longer term reversal or a dead-cat bounce remains the stuff of soothsayers and oracles, all of whom have at least a statistically probabilistic chance of being right once. But while it’s not quite time yet to break out the Dom Perignon, sparkling cider would probably be more in tune with the general crypto-climate, a small piece of news emanating from our nation’s capital may be worthy of note and could provide some explanation as to the slight bump in cryptocurrencies. On December 21, the Wall Street Journal reported that the first futures contract to pay out in Bitcoin is poised to be approved by regulators. “Big whoop, I hear you say.” But sarcasm and jadedness aside, the move by regulators is significant for several reasons which I will attempt to address here. For those of you who have been following me on Medium for some time, you will no doubt I have written ad nauseum about why I do not believe that Bitcoin futures are the way forward for Bitcoin and the greater adoption of cryptocurrencies for the common good. However, Bitcoin futures which actually pay out in Bitcoin and not greenbacks is an entirely different kettle of fish. Label me inconsistent if you must, but the move by regulators in D.C. is a big deal.

“One of these kids is doing his own thing, one of these kids is not quite the same.”

To begin with, in the wild west that is cryptocurrency exchanges, the Intercontinental Exchange who also happen to own the world’s number one regulated stock exchange, the New York Stock Exchange is getting the regulatory approval for the Bitcoin futures contract that pays out in Bitcoin. Both from my own experience as well as documented reports, institutional investors have long been wary of Bitcoin and other cryptocurrencies. From objection of provenance (how does one know these are not the tainted Mt. Gox Bitcoins) to custodial issues, the objections have been myriad. The other issue has also been the need to deposit cryptocurrencies with loosely or completely unregulated cryptocurrency exchanges (who regularly engage in regulatory arbitrage by moving jurisdictions constantly) — meaning that there’s no backstop, no counterparty to underwrite the substantial risk of leaving cryptocurrencies with exchanges. At least when it comes to the Intercontinental Exchange — there is a backstop.

Patient’s ECG was erratic, doctors recommended greater stimulus.

Second, with the ability for the futures contract to pay out in Bitcoin as opposed to dollars, the speculation is limited to within the cryptocurrency ecosystem. Allegations of dollar-manipulations of Bitcoin, while still possible, become less of an issue. Institutional investors who may have been sitting out cryptocurrencies thanks to the countless conspiracy theories of widespread Bitcoin price fixing, will now have a more transparent method to participate in the cryptocurrency ecosystem.

Finally there is the issue of physical delivery. With Bitcoin futures issued by the Chicago Board of Exchange and the Chicago Mercantile Exchange, Bitcoin futures contracts pay out in dollars. That may generate interest and invite speculation but it doesn’t encourage taking receipt of physical deliveries. With the Intercontinental Exchange’s Bitcoin futures, physical delivery (from a regulated source no less) now becomes a possibility and what could encourage greater and broader adoption as well as institutional traders than the need for physical delivery? It also characterizes Bitcoin under the guise of a commodity more clearly and given that the Intercontinental Exchange has been working closely with the Commodities and Futures Trading Commission (CFTC)to develop the Bitcoin futures contract, also puts it well within the ambit of its jurisdiction. For those unfamiliar with Washington, jurisdiction can mean everything. Because until a government agency takes an active role in regulating a new instrument, it could be anyone’s and no one’s problem all at the same time — meaning less regulatory certainty and lowered investor confidence.

And while the CFTC will only vote on the issue in 2019, the odds of the Bitcoin futures contract that pays out in Bitcoin is likely to go through, which can only be a good thing.

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Patrick Tan

Patrick Tan

CEO & General Counsel of Novum Alpha, a quantitative digital asset trading firm with regulated funds catering to accredited and institutional investors.

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