Why Wall Street's Angry About the Bitcoin Gold Rush

February 4, 2018

New York (Feb 4)  The cryptocurrency craze reached a crescendo last year, as a dramatic increase in the value of bitcoin and other up-and-coming tokens led to a big uptick in awareness of cryptocurrencies among ordinary investors. Yet even as some financial companies sought to take advantage of the rise in popularity in bitcoin, other well-established industry players believe that the gold-rush mentality in getting cryptocurrency-related products into the marketplace as quickly as possible was ill-advised.

The initial rollout of bitcoin futures in December was a turning point for the cryptocurrency markets. It has also turned out to be highly controversial. A managing director at Wall Street giant Goldman Sachs (NYSE:GS) explained at a regulatory meeting recently that the process by which bitcoin futures became available for trading didn't give everyone the time needed to make smart decisions about whether to allow institutional trading in cryptocurrency-related securities. It also didn't provide a fair evaluation of bitcoin futures trading in a manner consistent with the risk-management practices that regulators and the public expect major trade clearing companies to follow.

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A quick rollout for bitcoin futures

Goldman Sachs managing director Rana Yared recently spoke at a meeting of the Commodity Futures Trading Commission -- the federal agency that regulates futures and options markets -- in Washington, and her story reveals the way that at least one major Wall Street financial institution looked at the introduction of bitcoin futures. As Yared explained it, when CME Group (NASDAQ:CME) and Cboe Global Markets (NASDAQ:CBOE) made bitcoin futures available for public trading in December, Goldman hadn't yet come to a final decision about whether it would allow its traders to take positions in the futures contracts.

As a result, Goldman was put in an uncomfortable position. Clients of the institution who wanted to trade futures in bitcoin clearly expected their broker to be able to take trade tickets and buy or sell bitcoin futures on their behalf. Yet Goldman hadn't yet figured out how to manage the risks associated with handling bitcoin futures transactions, especially given its potential role as a clearinghouse for such transactions. Yared explained that having time to do so was crucial for the Wall Street giant. Her comments make sense given the scrutiny that Goldman received over its handling of its internal financial practices during the run-up to the financial crisis in the late 2000s.

How long is long enough?

For their part, the companies behind bitcoin futures have made it clear that they believe they acted appropriately. Kathleen Cronin, general counsel for CME Group, explained that the process for offering bitcoin futures took months and that the contracts don't differ much from other volatile futures contracts. The COO of Cboe Global Markets expressed similar sentiments, detailing the extensive vetting process with the CFTC and various players in the futures market that occurred prior to its initial launch of bitcoin futures.

At the center of the controversy are the CFTC's filing procedures for what it calls self-certification. Under those procedures, the CFTC allows listing of designated contract markets for trading without prior regulatory approval. All the designated contact market has to do is file a written self-certification that details its compliance with legal and regulatory requirements associated with futures markets.

The CFTC itself has expressed ambivalent views about its role as a regulator. In early December, the regulatory agency noted that the CME and CBOE had self-certified bitcoin futures contracts. CFTC Chair Christopher Giancarlo said at the time: "Bitcoin, a virtual currency, is a commodity unlike any the Commission has dealt with in the past. As a result, we have had extensive discussions with the exchanges regarding the proposed contracts." Giancarlo explained that the two companies had "agreed to significant enhancements" in setting what the agency called an "appropriate standard for oversight over these bitcoin contracts, given the CFTC's limited statutory ability to oversee the cash market for bitcoin." Yet it admitted that it spent only six weeks holding "rigorous discussions" with CME Group, as well as four months' worth of discussions with CBOE.

What's next for cryptocurrencies?

For bitcoin futures, there's not much that regulators can do to allay Wall Street's concerns about the pace of the process. But the CFTC could address Goldman's worries by requiring a more extensive vetting process as part of self-certification. That will be important if futures products on other cryptocurrencies become available later in 2018. Without the support of Wall Street institutions, the next logical ramp-up for bitcoin might not take hold in the way that bulls on the budding asset class hope.

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