On April 5th 2019, CME Group tweeted that the previous day saw an all-time high for bitcoin futures contracts. The “record trading day” saw 22,500 contracts totaling 112,700 bitcoin. Is this a sign that institutional investors are entering the digital asset space?
Bitcoin Futures Contracts Explained
First of all, it’s important to clarify that the Chicago Mercantile Exchange (CME) Group is not the sole platform to offer bitcoin futures. Therefore, the aforementioned figures do not represent the total amount of bitcoin futures during the given day of trading.
Yet still, the figures from CME alone are impressive:
Image courtesy of Twitter
Other platforms such as BitMex, NASDAQ, and Bakkt either currently offer bitcoin futures or are developing those services. The Chicago Board of Options Exchange (Cboe) previously offered bitcoin futures, but announced that it would be dropping them last month.
Futures contracts allow for the trading of the future price action of an asset.
Traders can take a position on the future price of an asset, often times without ever having to take delivery of that underlying asset.
That’s exactly how the cash-settled bitcoin futures of CME currently works. When a contract expires, the value is paid to the trader in cash as opposed to bitcoin.
The Commodity Futures Trading Commission (CFTC) gave the green light to bitcoin futures and pledged to allow for market forces— and not regulatory barriers— to “determine the appropriate value of bitcoin”.
In this sense, while Initial Coin Offerings (ICOs) and the majority of blockchain-based assets are experiencing a whirlwind of regulatory ambiguity, bitcoin futures witness regulatory safety.
Why Regulatory Clarity is Needed for Institutional Investors
Many agree that a primary reason why institutional investors are hesitant to enter the digital asset space is due to the lack of regulatory clarity.
More than $7 billion was raised from ICOs in 2018. Yet with little produced from those funds, governing bodies have increasingly entered the space.
Securities and Exchange Commission (SEC) Chairman Jay Clayton has publicly described how nearly every ICO he has seen, is constitutive of a securities offering.
As a result, security tokens emerged, which use blockchain technology while also abiding by existing securities laws.
The reason? There are clear regulatory requirements for securities offerings. So long as the enterprises using Distributed Ledger Technology (DLT) can prove their compliance with existing securities laws, they are safe from legal punishment.
What type of enterprises are most familiar with securities laws? The enterprises that deal with institutional investors.
The benefits of integrating DLT with traditional financial securities are indubitable. But regulatory safety is still absolutely crucial for DLT to be implemented in such a high-valued industry.
That regulatory safety can now be seen in two different facets: bitcoin futures and security tokens. With the recent buzz surrounding both, it’s fair to say that the future of institutional investor presence looks bright.
What do you think of CME’s ‘record trading day’? Do you agree that the regulatory clarity found in bitcoin futures and security tokens will eventually attract institutional investors to the digital asset sector? We want to know what you think in the comments section below.
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.