LedgerX delayed by red tape in its attempt to be first Bitcoin futures issuer

LedgerX delayed by red tape in its attempt to be first Bitcoin futures issuer

As the old adage goes, “If something can go wrong, it will.” Unfortunately, LedgerX, a current issuer of options and swaps in the U.S., was primed and ready to be the first firm to offer “real” Bitcoin futures contracts, ones that “physically settle in kind”, not in cash. In fact, it had announced proudly that it was ready to launch activity on last Wednesday, only to be stymied in its effort by an official at the Commodity Futures Trading Commission (CFTC). LedgerX officials had been misinformed about a pending approval.

If this had been jolly old England a few centuries back, we are sure that a few heads would have rolled, especially after the embarrassment that occurred for Paul Chou, the CEO of LedgerX. Ryan Gorman, the press representative for the firm has already announced his departure. Chou was furious enough to threaten the CFTC with litigation over “anti competitive behavior, breach of duty, [and] going against the [regulations].” Chou then remarked that the CFTC had asked the executive to “censor his tweets”.

The facts that have been presented would appear to favor Chou. He certainly has a case, but one should never assume that one has government approval until the document is held firmly in hand or via email. The “technicality”, as it were, had to do with how the CFTC or any other agency is to respond in a timely fashion to a request for approval. On June 25th, the CFTC had advised the management of LedgerX that:

LedgerX has requested that the CFTC amend its order of registration as a DCO, which limits LedgerX to clearing swaps, to allow it to clear futures listed on its DCM.

In other words, LedgerX needed two approvals –

  1. to become a “designated contract market (DCM)”, an approval that it had received, and
  2. to amend its “derivatives clearing organization (DCO) license” to allow for futures contracts. The second approval had not been issued, but the extenuating circumstances are what led to the confusion.

Per one report: “According to CFTC regulations (Title 17 part 39.3), the agency has 180 days to approve or deny a DCO application”. The regs go on to say that: “The Commission may stay the running of the 180-day review period if an application is materially incomplete, in accordance with section 6(a) of the Act.”

Chief operations, and risk officer Juthica Chou, has emphasized that the firm is still operating and issuing options and swaps, but noted: “We submitted the amendment on Nov. 8, 2018, it’s been more than 180 days, we don’t know why that’s the case [that it has not been approved]. We filed on Nov. 8 and we have email correspondences confirming there were no additional items that they needed for the amendment.”

A CFTC spokesman did speak to the press, but only on an anonymous basis: “Every new or amended DCO application needs to be affirmatively approved by the Commission. The absence of a decision does not constitute approval, and entity self-certification is not an option.”

The press had obviously been focused for months on the Bakkt crypto exchange and its leading edge platform that was committed to offering “physically settled” futures contracts in Bitcoin. Firms like LedgerX and ErisX are existing exchanges, not a startup like Bakkt. To a degree, each of these companies had a competitive advantage over Bakkt by already having necessary infrastructure in place, or so it seemed. As Chou explained, these physically-settled futures were to be different: “Not only are they delivered physically in the sense that our customers can get bitcoin after the futures expires, but also they can deposit bitcoin to trade in the first place.”

A few days back, LedgerX announced that the race was over. LedgerX was to commence bringing buyers ands sellers together for these special BTC futures contracts. These instruments are used to remove price volatility of the commodity and provide investors with an opportunity to leverage this volatility to their advantage, an activity that institutional investors especially prefer. Unfortunately, CFTC chief communications officer Michael Short declared on Thursday morning in an email:

LedgerX has not yet been approved by the Commission.

Perhaps, the CFTC deadline lapsed, but when has any government agency not dragged its feet and gotten caught up in its own bureaucracy? The facts may favor LedgerX at first perception, but the simple truth is that the “absence of a decision does not constitute approval”. The light was not green. It may have been amber, and, in their haste, LedgerX management decided to run the light and take a chance.

Aside from public embarrassment, there is a bright side to this story. A senior official with the CFTC has said that the requested amendment “appears to be in the very final stages of the approval process”. CEO Chou, however, is still bristling: “Basically, it’s just a total technicality that a swap and a future are different things and … it’s like, it’s actually a little different. The difference between futures and swaps is ridiculous, it’s the same product.”

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LedgerX delayed by red tape in its attempt to be first Bitcoin futures issuer

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