Quick Take
- A slew of firms — including ErisX, Seed CX, and Cboe — have
ether derivatives in the works
- But it doesn’t look like regulators are going to approve such
products anytime soon
- That might have to do with changes coming to the ethereum
network
A slew of crypto firms have their hearts set on launching
markets for ethereum derivatives, but the chance regulators get
comfortable with giving the green light for those products this
year seem slim, some market experts say.
“My personal view is that it is 50-50 at best,” Paul Chou, chief
executive officer of LedgerX, the crypto options exchange, said in
an interview, referring to the odds that an ethereum derivative
begins trading in 2019.
Chou’s firm has an ethereum option ready to trade, but it is
waiting on the CFTC’s blessing. The agency, which oversees trading
in commodity and futures markets in the U.S., put out last month a
so-called “Request for Input” to solicit information from market
participants that could help the regulator better understand
ethereum and the risk potential of derivatives markets built around
its native token ether. “The RFI seeks to understand similarities
and distinctions between certain virtual currencies, including
here ether and bitcoin, as well as ether-specific
opportunities, challenges, and risks,” the RFI said.
Across the market, trading firms are planning to launch futures
tied to ether. ErisX and Seed CX both share ambitions to launch
their own ethereum derivative product. Cboe Global Markets, the
exchange operator behind one of the markets for bitcoin futures in
the U.S., also has a future for ether in the works. Still, the
timeline for when the agency would approve these product hangs in
the balance, experts say. The comment period for the CFTC’s
fact-finding mission closes in mid-February. Then, the agency is
expected to deliberate on merits of ether futures.
“They aren’t hating on ethereum,” said Jeff Bandman, who runs a
consultancy firm in the crypto space. Bandman, a former fintech
adviser to the CFTC, added: “They understand what a proof of work
network is like because that’s how bitcoin works, but proof of
stake raises new questions. Specifically, what are the risks?”
Bandman said the agency could wrap things up fairly quickly once
the government is up and running again. “It could happen in the
first half of 2019.”
Still, Ethereum is in the process of changing the way the
network secures transactions from proof of work to proof of stake.
The former, which is how bitcoin’s blockchain runs, involves the
mining process by which “miners’ compete against each other to
solve algorithms to validate blocks and receive reward fees. Proof
of stake, however, requires coin holders to “stake” coins — which
are subject to loss for improper validation — in order to receive
reward fees proportional to the total staked. This week, the crypto
was supposed to undergo an upgrade dubbed Constantinople, one step
in a series of upgrades slated to go into effect before the full
switch to POS.
“There is a lot of uncertainty,” crypto attorney Nelson Rosario
said in an interview. “Regulators see this and they think “what
exactly are we giving you permission to sell a futures product
on.”
The switch to proof of stake could have implications for whether
futures tied to ether would trade, says one industry insider.
“Staking mimics a derivative product. If you are holding ether as a
stake than you are essentially betting it will go up and if you are
not you are effectively betting it will go down, at worst, or at
best you don’t want it sitting on the network,” he said.
“If you have a future on top of that then you are adding a level
of complexity that developers have not worked through,” the person
added.
In theory, the person said that adding a future on top of a
proof of stake ethereum could add “too many different pressures” on
the underlying spot market that would amplify price movement in the
underlying. The CFTC hinted at this concern in the RFI, saying
“How would the introduction of
derivative contracts on Ether potentially change or modify the
incentive structures that underlie a proof of stake consensus
model?”
There’s also a concern that ethereum might be too
centralized. “In my view, there are still outstanding
questions about Ethereum’s centralization regardless of Hinman’s
opinion. To this day, answers to even simple questions like the
initial Ethereum ICO distribution and how much was captured by
insiders (like Joe Lubin) remain unclear.” (where similar
improvements to Bitcoin are typically integrated via telegraphed
soft fork),” said Arjun Balaji, an analyst and technical adviser to
The Block. Still, William Hinman, a director of corporate
finance at the SEC, said the crypto in its current state is not a
security.
“Ethereum futures is as premature as the bitcoin ETF proposals
were two years ago,” Chou said. “We would love to list as many
different crypto products as possible. We have the
infrastructure.”
A spokeswoman for ErisX declined to comment. Seed CX CEO Edward
Woodford said the firm is “excited to launch ether derivative
products in 2019, subject to regulatory approval.”
Still, that approval might not come in 2019. “It’s completely
uncertain,” one insider told The Block.