The US Commodity Futures Trading Commission (CFTC) has issued an order granting LedgerX, an institutional trading and clearing platform for digital currencies, registration as a derivatives clearing organisation under the Commodity Exchange Act (CEA).
LedgerX will be the first US federally regulated exchange and clearing house for derivatives contracts settling in digital currencies.
Under the order, LedgerX will be authorised to provide clearing services for fully collateralised digital currency swaps. LedgerX, which was also granted an order of registration as a Swap Execution Facility (SEF) on July 6, 2017, initially plans to clear bitcoin options.
In response to a request from LedgerX, the Commission’s Division of Clearing and Risk also today issued a letter exempting LedgerX from complying with certain commission regulations due to LedgerX’s fully collateralised clearing model.
In a statement issued today, the CFTC says that the authorisation to provide clearing services for fully collateralised digital currency swaps does not constitute or imply a commission endorsement of the use of digital currency generally, or bitcoin specifically.
Participants in the LedgerX venue will be able to obtain and hedge bitcoin and other digital currencies using exchange-traded and centrally cleared options contracts. Initially, LedgerX anticipates listing one- to six-month options contracts for bitcoin (BTC). Other digital currency contracts such as ethereum (ETH) options, are expected to follow.
Eligible participants in the LedgerX venue will include registered broker-dealers, banks, futures commission merchants, qualified commodity pool entities and qualified high net-worth investors.
“A US federally regulated venue for derivative contracts settling in digital currencies opens the market to a much larger customer base,” states Paul Chou, CEO, LedgerX.
He adds: “We are seeing strong demand from institutions that previously could not participate in the bitcoin market due to compliance restrictions against unregulated venues. In particular, there is a desire for fund managers to hold financial instruments that are not correlated with the broader equity market, and digital currencies meet that need.”
Mark Wetjen, a former CFTC Commissioner who sits on the board of directors for LedgerX’s parent company, Ledger Holdings, comments: “These are exciting times to have a new digital asset class emerge. I hope that the effort LedgerX put forward in the US can set the stage for a global approach to this new digital asset class.”
Gary DeWaal, special counsel at the law firm Katten Muchin Rosenman, which assisted LedgerX in its CFTC application process, hails this announcement as “a historic milestone for derivatives and for digital currencies”.
He continues: “To me, it is equivalent to the launch of currency futures back in 1972 that heralded the beginning of exchange-traded and cleared derivatives based on financial products.”