Last week, all eyes were on bitcoin’s halving. And, at least ostensibly, for good reason: it’s not every day that the supply of new bitcoins is cut in half. (Actually, it’s every four years). And in the context of ever-growing government debt, plenty of speculators are wondering if bitcoin, due to its increasing scarcity, might eventually demonstrate its worthiness to be understood as “digital gold,” and by extension, a must-have reserve asset.
But something else happened that could turn out to be just as significant, at least for U.S. markets. As several news services reported, crypto derivatives platform ErisX has launched ether futures contracts.The new contracts — the first U.S. futures contracts for ether, one of the world’s most popular and commonly held cryptocurrencies — began trading last week.
Important for more than just the speculators
The introduction of ether futures is important for a number of reasons. As ErisX’s CEO Thomas Chippas lucidly explains in this week’s Fintech Beat podcast, market participants may rely on derivatives for different purposes. Whereas bitcoin’s use value lies in its deployment as a medium of payment, ether is a necessary resource for building and running smart contract applications on the ethereum blockchain. Thus having a mechanism to lock in prices can provide certainty and peace of mind to some end users like developers whose businesses rely on this particular set of technology.
But there’s enormous regulatory significance as well. For one, it’s the first time a futures product has been devised and sanctioned by the Commodity Futures Trading Commission for a cryptocurrency besides bitcoin. Which is no small feat. Considerable debate has invariably arisen with it, along with virtually every digital asset, as to whether it falls within the jurisdiction of the Securities Exchange Commission as a security, or if it is subject to potential CFTC oversight as a commodity. The fact that ether’s status has been not only gestured to by leading officials in speeches, but also operationally validated in ErisX’s listing and coordination with CFTC authorities, has put any doubts as to ether’s legal status to rest.
Equally notable is that the listing is happening with a product whose operational underpinnings are generally understood to be more complex than bitcoin’s. Precisely because ether’s blockchain enables the use of smart contracts, a set of coded computer functions that serve as a very different architecture than that involved in the bitcoin ecosystem, the listing opens the commercial and regulatory door to countless other kinds of cryptoderivatives.
But perhaps the truly interesting thing about the launch of ether futures is the relative absence of criticism concerning what is effectively the financialization of the asset. Or at least the financialization of the risk of the (digital) asset.
In the case of bitcoin, the very prospect of a futures product sparked fears in 2018 that the sector would attract institutional dollars that would help to inflate prices, and in turn expose retail investors, if only indirectly, to highly speculative investments. The argument went that the introduction of futures contracts served as a facilitator for investments not in the bitcoin market itself, but instead into synthetic derivatives based on the price movement. Investors, funded by working people, would in essence be betting on the appreciation or depreciation of a cryptocurrency, and in the process introduce more investor risk to the whims of inherently volatile markets.
Making things worse, many argued, was the fact that the futures contracts would be subject to manipulation because underlying bitcoin reference prices were easily manipulated due to the unregulated nature of most bitcoin exchanges and the thin trading volume that occurs on them.
Interestingly, while the manipulation concerns remain — though the CFTC has taken some noteworthy actions to police bitcoin futures markets — the bubble fears have faded. Indeed, the San Francisco Fed concluded after the launch of bitcoin futures that the markets helped push bitcoin’s price down. According to their analysis, once bitcoin futures were introduced on the Chicago Mercantile Exchange, short sellers, too, were able to participate in what was a market monopolized by long positions. And in betting in effect against bitcoin, short sellers’ activities helped push the price down, not up.
It’s perhaps for this reason that this time around, I haven’t seen similar concerns raised about ether futures sparking a flood of speculative investments in it.
The relative calm could be due to the growing maturity of the market. Or due to the fact that after having listed bitcoin, authorities and would-be critics are more comfortable with the process. Or just perhaps it’s due to an expectation that ether futures will act to dampen warrantless speculation, or at least rampant bubbles.
Any of the above explanations, if true, would signal momentous changes in popular, and indeed regulatory perspective. So in the end, the deafening silence has got to be good for the industry — in many ways better than all the press generated by bitcoin’s halving.
Yet it’s important to note that we’re still at very early times in the process of the market’s development. And in a world with a global pandemic, falling stock prices, and bitcoin’s halving, people have had their attention directed elsewhere. So the story of ether’s futures, both literally and figuratively, is far from written. And the test may well be how such products perform should perilous economic and financial conditions truly take a turn for the worse.
Brummer is co-founder of Fintech Beat, CQ Roll Call’s deep dive on how technology is transforming the banking and financial services sector. He is a professor at Georgetown Law, a member of the Commodity Futures Trading Commission’s Subcommittee on Virtual Currencies, and a member of the Consultative Working Group for the European Securities and Markets Authority’s Financial Innovation Standing Committee.