The U.S. Commodity Futures Commission (CFTC) has granted LedgerX, based in New York, the license to exchange and clear cryptocurrency derivatives.
The approval makes LedgerX the first federally regulated bitcoin options exchange and clearing house authorized to list and clear fully-collateralized and physically-settled bitcoin options for the institutional market.
LedgerX, which was also granted a license to operate as a swap execution facility, initially plans to list one- to six-month options contracts for bitcoin. Other digital currency contracts such as ethereum (ETH) options, for example, are expected to follow as well.
Paul Chou, LedgerX co-founder and CEO, member the CFTC’s Technology Advisory Committee, thinks that this fact means a lot, not just for the industry, but at a global scale, because the CFTC will set the example of what a well-licensed crypto-based clearinghouse and exchange will look like.
It should be noted, that the CFTC, however, clarified in its statement that the approval of LedgerX’s license “does not constitute or imply a commission endorsement of the use of digital currency generally, or bitcoin specifically.”
Now, with the settlement and clearing license, participants of the LedgerX trading platform will be able to hedge bitcoin and later other digital currencies using exchange-traded and centrally cleared option contracts.
Similar to G5 currencies, which are commonly thought of as being safe investments owing to their relative stability, Chou forecasts that there may be three to five cryptocurrencies in the future, which, basing on their market capitalization and functionality, will be described as “viable” candidates for the exchange and clearinghouse.
“Instead of evaluating different governments, as with the case of a G5 currency”, said Chou. “You’ll be evaluating different technologies or approaches underneath these digital currencies.”
Also, he adds, that a regulated clearing house is likely to open the market to a lot of investors such as the large institutions.
“We are seeing strong demand from institutions that previously could not participate in the bitcoin market due to compliance restrictions against unregulated venues,” said Chou.
After around three years of working and waiting, progress had been moving slowly leading up to the event. The license took so much time to win the approval partly because of a long education process, said Chou. Another reason may be that LedgerX was intended to meet capital requirements implemented by the Dodd-Frank Act, which requires that a DCO hold operating costs to run its business for a year.
To get the clearing license, LedgerX secured $11.4 million in funding in May led by Miami International Holdings Inc and China’s Huiyin Blockchain Venture Investments.
Founded in 2013, LedgerX first received a temporary approval to operate as a swap execution facility in 2015.