Bakkt’s Launch & CFTC’s Role in Promoting the Crypto Derivatives Market
Following our participation last week in Bakkt’s Institutional Digital Asset Summit, we remain convinced that Bakkt’s launch in late Q3 will accelerate the entry of institutional investors into crypto, and the regulatory playing field needs to be leveled for a thriving derivatives market to develop. Key points (some of which were also recently addressed by our friends at Fundstrat) included:
- Bakkt tackles many of the barriers to adoption for traditional investors seeking to expand into crypto — merging custody, compliance, payments, and physically settled daily and monthly futures contracts in a single platform under parent company ICE.
- CFTC commissioner Dawn Stump discussed the CFTC’s derivatives regulatory and enforcement duties. CFTC is more open to financial innovation because of its rules-based approach to approving products. In addition to regulating derivatives, it also works with state Attorneys General and federal agencies on fraud and enforcement actions (as we are now seeing with its probe of Seychelles-based exchange BitMEX). The LabCFTC initiative helps market participants share info and shape the CFTC’s views.
- The CFTC noted the growing demand for Bitcoin futures, and said it expects more contracts beyond cash-settled Bitcoin products and is currently exploring ETH products.
Today’s Crypto Derivatives Environment & the Need for Regulated Markets
Commissioner Stump’s comments hammered home the fact that the CFTC’s jurisdiction over crypto derivatives is unambiguous, unlike many crypto regulatory issues. Consistent with our forward-leaning regulatory approach, BitOoda formed OODA Commodities as an NFA-licensed IB almost a year ago and our customer-facing team holds their Series 3 licenses, enabling our clients to execute futures and options in a fully compliant way.
In our view, the derivatives market is an area in which we have moved past crypto’s “Wild West” days when licensing and registration requirements were unclear. We need to embrace the CFTC’s role as a tool to grow market adoption and spur institutional participation, rather than allowing firms to operate in an unregulated fashion. The uniform requirement for Commodity Derivative Brokers is to pass the Series 3 examination and register with the NFA as a critical foundation for the development of fair and orderly markets. We believe that any firm directly interacting with clients or facing counterparties must be regulated and their employees must be licensed.
Q&A on Crypto Derivatives Regulation & Brokerage
• Are the requirements for commodity derivatives brokers different when handling digital assets? Absolutely not!
• What products are considered derivatives? CME Futures, Bakkt and OTC Swaps and Options.
• What can BitOoda/OODA Commodities execute on my behalf? All of the above! We use Clearport, ICEBlock, and an SDR such as ICE Trade Vault to compliantly execute transactions.
• What do I need to do on my end? Just enable your FCM so that BitOoda/OODA Commodities can execute on your behalf. Our Ops team can then enter your trades into Clearport and ICE Block.
• What are Blocks? Blocks are trades executed in volatile markets, in large size, or complicated structures. BitOoda has deep experience and expertise in Block trading and we have pioneered new types of crypto structured products.
• What are the risks of unregulated derivatives brokering? If a firm is found to be executing derivatives without the necessary licenses, they could face fines, be suspended, or be barred by the CFTC/NFA.
• What happens to the trades executed by an unregistered and unlicensed firm? Most likely they will be busted or unwound, typically resulting in significant disruption to the industry.
• What are the benefits of working with the CFTC and NFA to level the playing field in the crypto derivatives market?
- Ensuring that the buy-side is interacting with licensed, knowledgeable individuals who can execute their hedging or speculative strategies in a thoughtful approach.
- Giving confidence to institutional capital allocators to build AUM growth, which in turn allows capital to flow to innovators building more advanced projects in the space.
- Enabling the U.S. to become a global leader in blockchain-enabled financial products, similar to our role in traditional asset classes.
- Driving institutional adoption and the development of more mature consumer protections.
- Achieving an effective balance between encouraging innovation and thoughtful regulation, such as by leveraging LabCFTC.