Bitcoin derivatives clearinghouse LedgerX has announced that the first bitcoin derivatives trades have taken place on its platform – an important milestone for the nascent digital currency market that could open the door to more institutional involvement and, some say, the creation of the first bitcoin-focused ETF.
LedgerX confirmed rumors that it had already started clearing bitcoin derivatives trades in a statement provided to CoinDesk and a handful of other media outlets. According to figures provided by the company, LedgerX facilitated trading in 176 swaps and options contracts in its first week, an amount with a notional values of more than $1 million, according to CEO Paul Chou.
"This week, a new standard is set for transparency, oversight and counter-party assurance. Institutional investors and traders can now rely on a guaranteed clearing and settlement process when transacting bitcoin contracts," Chou said.
As CoinDesk points out, while the initial LedgerX trades appear to be exclusively bitcoin focused, the details of the license granted to the company by the CFTC in July allow for the creation of derivatives for other digital currencies as well. The company is reportedly working with options trading shops, asset managers, hedge funds, bitcoin miners, family offices, investment banks and virtually anybody else interested in helping it create a market for the new contracts.
"Our regulated, institutional-grade platform enables participants who were sitting on the sidelines, to enter the digital currency market."
LedgerX is licensed as both a swap execution facility (SEF) and a derivatives clearing organization (DCO).
The CFTC gave its blessing to LedgerX back in July when it approved the creation of the first designed bitcoin SEF, or swap execution facility. Previously, bitcoin derivatives were traded exclusively OTC on exchanges like BitMEX. But now, trading in bitcoin options will be centrally cleared in the same manner as option contracts on equities.
Congress mandated the creation of SEFs as part of its Dodd-Frank Wall Street reform bill in a bid to bring greater transparency to derivatives trading after synthetic CDOs and other shady “hedging instruments” tied to the mortgage securities helped wreck the economy in 2008,
Dodd Frank, helped by a raft of CFTC rules, helped create a complex trade-reporting ecosystem in US markets, which RiskFocus has illustrated in the infographic below:
Bitcoin options trading has come a long way since late 2015, when the CFTC officially went after bitcoin company Coinflip for operating a platform for trading bitcoin options without the proper authorization – confirming in the process that bitcoin would be treated as a commodity for regulatory purposes.
We imagine LedgerX won’t have too difficult of a time moving inventory, considering bitcoin’s astounding run of new record highs persists unabated. In a market starved for volatility, giving the "big boys" the ability to trade with massive leverage on what is already the most volatile asset class in existence is just what some funds need to make their year as they swing for the fences with 20x (or more in) margin.
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