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Bitcoin futures: regulatory crackdown is good news

Bitcoin futures: regulatory crackdown is good news

Growing regulatory crackdown of cryptocurrencies will be credit positive for bitcoin futures providers, CME Group and Cboe Global Markets, says Moody’s.

The ratings agency currently has an Aa3 stable rating for CME and Baa1 positive rating for Cboe.

Its comments come in the wake of a recent increase in the number of regulators imposing regulatory bans on cryptocurrency exchanges and initial coin offering (ICO) issuers.

In the latest, Hong Kong’s Securities and Futures Commission said that it has taken regulatory action against 14 cryptocurrency exchanges and issuers of ICO for not complying with its regime.

This is after the US Senate Committee on Banking, Housing and Urban Affairs held a hearing on virtual currencies and the role the US Securities and Exchange Commission and the US Commodity Futures Trading Commission would play in overseeing those markets.

‘Improved oversight of spot cryptocurrency exchanges would be credit positive for CME Group and Cboe Global Markets, which offer futures products associated with these exchanges,’ said Fadi Abdel Massih, analyst at Moody’s Investor Services

‘Because they [CME and Cboe] would be exposed to reputational risks from being indirectly associated with significant fraud or other abnormalities that may occur in the spot exchanges.’

Since December 2017, CME and Cboe have offered Bitcoin futures contracts that allow traders to speculate on the price of the cryptocurrency and holders to hedge their Bitcoin positions.

Bitcoin has fallen from highs of $20,000 in December to just above $8,000 in February. And the price volatility and limited regulatory oversight of the spot exchanges pose risk-management challenges for central counterparty clearing houses, Massih added.

Both CME and Cboe have thus set relatively high margins – of over 40% - for Bitcoin futures trades to mitigate counterparty risk as volumes remain low. 

In fact, about 40% of CME's volume in bitcoin futures takes place outside of US trading hours.

‘Interest in Bitcoin futures has been growing,’ said Dave Chapman, chairman of Octagon Strategy, an over-the-counter digital assets trading desk. 

‘There are a lot of institutional investors that were sitting on the sidelines, not wanting to take a position because there weren’t appropriate venues for them to do so which is obviously solved now,’ he told Citywire Asia.

The Hong Kong-based company, which counts family offices and high-net worth-individuals among its clients, is planning to offer bitcoin futures by the end of 2018.

‘There’s definitely a drive for it. We wouldn’t have plans to offer bitcoin futures products to our counterparts unless we saw that there would be adequate drive,’ Chapman said.

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