Bitcoin investors are about to get their first taste of the naked shorts…
UPDATE: From the CME Group, wow, the gloves are off on the gold bashing:
Bitcoin, Gold and Fiat Currencies Demand and Regulation
While gold and bitcoin supply comes from miners, what drives demand is another story. Gold’s demand side is mainly as jewelry and as an alternative currency that get stored in vaults, albeit one that pays no interest. As such, when interest rate expectations increase, gold prices tend to fall and vice versa.
By contrast, demand for bitcoin has a reputation of being used for money laundering, tax evasion and avoidance of regulated cross-border money flows. The motivation is that the transactions are extremely hard to trace, yet they offer considerable security. Proponents of bitcoin and cryptocurrencies would argue that the reputation of cryptocurrencies being used for criminal purposes may not be entirely fair. After all, fiat currency cash is used by criminal organizations and tax evaders the world over.
A little historical background may be informative. When the euro was introduced at the end of the 1990s, illegal drug and money laundering transactions in Europe, including Eastern Europe, were often conducted in large denomination Deutsche Mark (DM) paper currency. The advent of the euro meant that the DM cash notes had to be turned in and exchanged for euros, and the unintended consequence was that large denomination U.S. dollar paper currency filled the void left by the DM. This switch from DM to U.S. dollars actually helped push the euro lower against the U.S. dollar around the time of the transition.
It is also worth noting that of the $1 trillion or so of U.S. paper currency outstanding, about 50% resides outside the United States. Unfortunately for drug dealers and money launderers, the digital revolution is rapidly eliminating the need for paper currency and even the ability to use it secretly and discreetly. Bars, restaurants, and dry cleaners are no long bastions of cash transactions. This has created a market opportunity, so to speak, for cryptocurrencies that can facilitate secure, yet difficult to trace transactions.
Regulators, tax collectors, central banks, etc., around the world can be expected to act aggressively to combat illegal uses of digital currencies, especially as they gain traction in the global economy. U.S. regulators are beginning to act. The Securities and Exchange Commission (SEC) has launched fraud cases. China has started to rein in the use of cryptocurrencies for moving money out of the country.
Regulators are also moving to bring cryptocurrency platforms into the mainstream. For example, in July 2017, the Commodities Futures Trading Commission (CFTC) approved a new Derivatives Clearing Organization (DCO) which was also granted an order of registration as a Swap Execution Facility (SEF). Under the order, the new DCO will be authorized to provide clearing services for fully-collateralized digital currency swaps (i.e., Bitcoins, etc.). Several other countries are also onboard with encouraging cryptocurrencies for legal commerce, including Japan and South Korea.
Some of the cryptocurrency platforms are starting to perform active user due diligence in terms of Know Your Client (KYC) and Anti-Money Laundering (AML), putting them in a position to successfully meet a variety of regulatory tests and become more mainstream with their business models.
And, one should recognize that regulation does not mean the demise of cryptocurrencies – only that the motivating uses will eventually have to be dominated by legal activities. For now, the regulatory landscape for cryptocurrencies is very much a moving target around the world.
- A natural tension exists between stores of value and mediums of exchange.
- Gold and bitcoin have been great, if erratic, stores of value.
- Gold and bitcoin appreciate because of the slow growth of mining supply.
- Fiat currencies are more practical as mediums of exchange because they lose value which encourages holders to exchange them for goods and services.
- Strong stores of value encourage hoarding, deflation and financial instability.
- They also make for poor units of account and methods of deferred payment.
CME Group Announces Launch of Bitcoin Futures
— CMEGroup (@CMEGroup) October 31, 2017
CHICAGO, Oct. 31, 2017 /PRNewswire/ — CME Group, the world’s leading and most diverse derivatives marketplace, today announced it intends to launch bitcoin futures in the fourth quarter of 2017, pending all relevant regulatory review periods.
The new contract will be cash-settled, based on the CME CF Bitcoin Reference Rate (BRR) which serves as a once-a-day reference rate of the U.S. dollar price of bitcoin. Bitcoin futures will be listed on and subject to the rules of CME.
“Given increasing client interest in the evolving cryptocurrency markets, we have decided to introduce a bitcoin futures contract,” said Terry Duffy, CME Group Chairman and Chief Executive Officer. “As the world’s largest regulated FX marketplace, CME Group is the natural home for this new vehicle that will provide investors with transparency, price discovery and risk transfer capabilities.”
Since November 2016, CME Group and Crypto Facilities Ltd. have calculated and published the BRR, which aggregates the trade flow of major bitcoin spot exchanges during a calculation window into the U.S. Dollar price of one bitcoin as of 4:00 p.m. London time. The BRR is designed around the IOSCO Principles for Financial Benchmarks. Bitstamp, GDAX, itBit and Kraken are the constituent exchanges that currently contribute the pricing data for calculating the BRR.
“We are excited to work with CME Group on this product and see the BRR used as the settlement mechanism of this important product,” said Dr.Timo Schlaefer, CEO of Crypto Facilities. “The BRR has proven to reliably and transparently reflect global bitcoin-dollar trading and has become the price reference of choice for financial institutions, trading firms and data providers worldwide.”
CME Group and Crypto Facilities Ltd. also publish the CME CF Bitcoin Real Time Index (BRTI) to provide price transparency to the spot bitcoin market. The BRTI combines global demand to buy and sell bitcoin into a consolidated order book and reflects the fair, instantaneous U.S. dollar price of bitcoin in a spot price. The BRTI is published in real time and is suitable for marking portfolios, executing intra-day bitcoin transactions and risk management.
Cryptocurrency market capitalization has grown in recent years to $172 billion, with bitcoin representing more than 54 percent of that total, or $94 billion. The bitcoin spot market has also grown to trade roughly $1.5 billion in notional value each day.
For more information on this product, please visit cmegroup.com/bitcoinfutures.
As the world’s leading and most diverse derivatives marketplace, CME Group (www.cmegroup.com) is where the world comes to manage risk. Through its exchanges, CME Group offers the widest range of global benchmark products across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange,energy, agricultural products and metals. CME Group provides electronic trading globally on its CME Globex platform. The company also offers clearing and settlement services across asset classes for exchange-traded and over-the-counter derivatives through CME Clearing. CME Group’s products and services ensure that businesses around the world can effectively manage risk and achieve growth.
CME Group, the Globe Logo, CME, Chicago Mercantile Exchange, CME Direct and Globex are registered trademarks of Chicago Mercantile Exchange Inc. All other trademarks are the property of their respective owners.
SOURCE CME Group