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TD Ameritrade-backed ErisX and Binance bring small investors more futures options

A new license from the CFTC and a new futures exchange from Binance means more futures can be settled in cryptocurrency rather than cash

The cryptocurrency futures market took another two steps towards normalization Tuesday.

First, the U.S. Commodity Futures Trading Commission (CFTC) approved a second futures license, this time for TD Ameritrade-backed ErisX. Last week, LedgerX became the first cryptocurrency firm to win the derivatives clearing organization (DCO) license, beating out NASDAQ, and New York Stock Exchange (NYSE) owner Intercontinental Exchange (ICE).

Second, Binance CEO Changpeng “CZ” Zhao announced that the leading cryptocurrency exchange will begin offering futures during a keynote speech at the Asia Blockchain Summit in Taiwan on July 2. According to Cointelegraph, Zhao said the firm will begin by offering bitcoin (BTC) and tether (USDt) pairs, with others coming later. While no launch date has been set, a test platform should be live in a few weeks, he added.

The story added that leverage of up to 20x will be available. That is substantially less than the 100x limit promised by competitor Bitfinex in the May whitepaper for its billion-dollar LEO exchange token offering. U.S. traders will likely not be able to access this service, as Binance announced on June 13 that it will ban U.S. clients by September 12. It is starting up a separate American cryptocurrency exchange, Binance.us.

While margin trading allows bigger gains, it is also very risky, with traders able to rack up losses far above their actual investment. Traders are generally required to put up collateral which can be sold by the exchange if losses mount. Futures traders on the Poloniex exchange lost $14.4 million in a flash crash on June 6, when the CLAM cryptocurrency lost more than two thirds of its value in two hours.

In a June 26 Tweet, the Chicago Mercantile Exchange (CME) announced that its bitcoin futures contracts reached $1.7 billion in notional value—the total value of the asset in the contract—beating its record by more than 30% on 26,491 contracts. It added that “institutional interest continues to build.”

However, The Block’s Ryan Todd noted that interest by institutional buyers actually appears to be down. Compared to the first quarter of 2019, the number of CFTC cryptocurrency traders with positions large enough to be reportable, according to the CFTC, dropped nearly in half in Q2. That left fewer than 50 traders, the commission noted in a weekly activity report. Beyond that, only four or five were institutional traders or asset managers, and three quarters of the total short positions last week were held by just four accounts, suggesting fewer new entrants into the market, he said.

A second futures exchange

The ErisX cryptocurrency exchange’s new DCO license will allow it to add futures to the spot market it launched in April. Combined with the Designated Contract Market (DCM) license it has held since 2011, the firm will be able to offer physically settled contracts in cryptocurrencies—meaning the commodity is handed over rather than fiat cash being given to the winner.

In a physically settled futures contract, a specified amount of the cryptocurrency is delivered by one person to another at a specified time at the price of the currency when the contract was made. Futures are a zero-sum game, meaning there is always a winner and a loser. One party shorts the commodity, making money if the price goes down, while the long bet wins if the price goes up.

ErisX, which has held a Designated Contract Market (DCM) license since 2011, is planning to launch its regulated futures market later this year, it said in a statement. With the two licenses it will be able to clear and settle contracts with retail and institutional investors——essentially acting as the intermediary between the two parties when the commodity (cryptocurrency is this case) is handed over.

“ErisX is unique in that for our digital asset market, we have divided the trading and settlement functions using traditional DCM (exchange) and DCO (clearing) models,” said Thomas Chippas, CEO of ErisX. “This reflects the structure that institutional investors expect from other asset classes and will help drive these markets toward greater relevance and accessibility.”

ErisX futures contracts for virtual currencies will have to be fully collateralized, the CFTC noted. The collateral required for cryptocurrency contracts can be substantially higher than other types of commodity futures to account for virtual assets’ volatility.

Leo Jakobson, Modern Consensus editor-in-chief, is a New York-based journalist who has traveled the world writing about incentive travel. He has also covered consumer and employee engagement, small business, the East Coast side of the Internet boom and bust, and New York City crime, nightlife, and politics. Disclosure: Jakobson owns no cryptocurrencies.

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