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Excludes non-U. You must be the original recipient of this offer to enroll. Customers may only be enrolled in one offer at a time. Cannot be combined with any other offers. Bitcoin futures emerged most recently, raising a new set of issues. Bitcoin Futures Futures are contracts to buy or sell a specific quantity of an asset at a specified price and date in the future.
Perhaps this is not surprising given that clearinghouses are for-profit institutions with an incentive to introduce new products to trade. Unfortunately, the launching of these innovative products through the 1-day self-certification process did not allow for proper public transparency and input. Under law, exchanges may self-certify a product for trading by the close of business one day and then list the product for trading the next day.
This process does not require CFTC approval or input and allows little or no time for public review. We believe that this expedited self-certification process for these novel products does not align with the potential risks that underlie their trading and should be reviewed. Regulating Bitcoin Futures The entry of bitcoin futures into the market opens it to regulation in a way that bitcoin as a currency and the blockchain technology did not.
There are several factors to consider regarding the regulation of bitcoin futures. Whether to Regulate In the bitcoin context, the threshold question is whether to regulate. There may be several drawbacks inherent to regulation. For example, critics have raised concerns about bias in the enforcement of regulatory schemes. Futures markets multiply losses and rewards by allowing leveraging, [89] which differs from stocks. Both CME and CBOE temporarily halted trading, lest the financial condition of the markets—and their clearinghouses—deteriorate further.
There are several ways to do so that are considered next. How to Regulate There are numerous safeguards already implemented for protecting the clearinghouses and the greater financial markets. However, because of the uniqueness of bitcoin futures, some additional measures might be introduced to manage risk. Some banks and governments have outright banned bitcoin futures. For example, Merrill Lynch blocked clients and financial advisers who trade on their behalf from buying bitcoin products. Position Limits.
One risk management option is to put a limit on the number of positions that may be held by any person. Futures are highly leveraged because traders can put down a deposit that is a low percentage of the total value of the assets being traded, which magnifies gains or losses.
Both are collateral generally consisting of cash or securities posted by a clearing member to protect the clearinghouse in case of default. Therefore, margin requirements can offset the risk of default. Guarantee Funds. Further financial buffers exist in the guarantee funds of the clearinghouses, which are drawn upon to cover bad trades. This would ensure that only parties that trade bitcoin futures would be financially responsible for contributing to its guarantee fund.
Stress Testing. The idea of stress testing, a category of regulation, is not new. For example, one commentator has criticized the regulation-by-hypothetical regime, namely by stress tests and living wills, [] and others have suggested it must be either abandoned or strengthened because of its current flaws. Any sort of model requires justification of why certain variables are in the model and what values are used for the variables.
Hacking Concerns. The essence of cryptocurrency is its digital nature, which raises cybersecurity issues such as the theft of bitcoin and software hacking. Gox, with approximately half-a-billion dollars in bitcoin , bitcoin stolen. Exchange customers had no remedy.
In contrast, it is harder to steal stock because it has more of an ownership record. As a result, cybersecurity issues surrounding bitcoin should be considered in any potential regulatory scheme. Conclusion The recent emergence of bitcoin futures poses unique risks to the economy, raising questions of regulation. The potential regulatory regime for bitcoin futures includes position limits and stress testing. Some observers think bitcoin will fail before a regulatory approach can develop.
Indeed, bitcoin has its shortcomings that might slow its growth, including the length to process transactions, high fees, and volatility. Perhaps new products will replace bitcoin. The future is unclear about what new products will be coming next, but lessons from bitcoin apply to other cryptocurrencies and similar ventures.
These familiar risks should be addressed in order to minimize the chance of a financial crisis. However, the U. See, e. Griffith notes on systematic risk that: Systemic risk refers to the linkages and interdependencies between participants in the financial market, such that a significant loss initially touching only a small number of participants can spread and threaten to engulf the entire system, ultimately causing a contraction in the real economy.
Systemic risk is an appropriate target for regulatory attention because private actors lack adequate incentives to control it. Sean J. They are, at their core, nothing more than a contractual means by which parties allocate the risk of a fluctuation in price of an underlying reference asset. Hilary J. David Felsenthal et al. As the markets grow, and if disruptions occur, the CFTC and other federal regulators may feel pressure to expand their supervision of these markets.
It was heralded as the first regulated Bitcoin exchange. As explained on a bitcoin website: Bitcoin Mining is a peer-to-peer computer process used to secure and verify bitcoin transactions—payments from one user to another on a decentralized network. Each group of transactions is called a block. Blocks are secured by Bitcoin miners and build on top of each other forming a chain.
This ledger of past transactions is called the blockchain. The blockchain serves to confirm transactions to the rest of the network as having taken place. Bitcoin nodes use the blockchain to distinguish legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere.
Bitcoin Mining, Bitcoin. Sean Foley et al. Kevin V. The growing mainstream acceptance of Bitcoin, however, is best illustrated by the growing number of leading merchants that have decided to accept Bitcoin payments. Online , n. Tax Rev. McKinney, Jr. Nicholas A. See supra note 15 and accompanying text. CFTC Chairman Giancarlo stated: Others, however, argue that this is all hype or technological alchemy and that the current interest in virtual currencies is overblown and resembles wishful thinking, a fever, even a mania.
Christopher Giancarlo Before the U.
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