LedgerX snags license from CFTC, clearing the way for first physically delivered futures and swaps in US

Quick Take

  • LedgerX, the crypto derivatives exchange and clearinghouse, has secured the licenses it says will clear the way for physically delivered bitcoin futures – beating both Bakkt and ErisX to the mark
  • Still, questions remain about the specific nature of the contracts on offer and their appeal

LedgerX is preparing to launch its physically delivered bitcoin futures product after clinching a so-called designated contract market license from the Commodities Futures Trading Commission. 

The firm, which is better known for supporting the trading of options tied to bitcoin, has taken the lead from U.S.-based crypto exchanges Bakkt, Seed CX, and ErisX, which are all still awaiting regulatory licenses to enter the new crypto derivatives market.

“The Commodity Futures Trading Commission (CFTC) announced today that it has approved the application of LedgerX LLC (LedgerX) for designation as a contract market,” the agency wrote.  

The DCM license will complement its so-called DCO license. 

In trading physically delivered futures, customers are paid out in actual bitcoin at the expiration of a contract, whereas cash-settled futures are paid out in USD. Current market-leader CME currently only offers cash-settled products, which are more prone to manipulation according to Richard Gorelick, head of markets at trading firm DRW, who told the CFTC last year that they “continue[d] to have concerns” about pegging crypto futures contracts to cash.

Retail push

At the same time, LedgerX recently announced it would shy away from large investors and bulge bracket banks to retail.

Indeed, the new futures product will form part of the firm’s broader retail push via a new platform, dubbed Omni, which will support trading of swaps, options and futures for retail users. The firm told The Block last month that it had submitted a request for a license from regulators last November, hoping to offer the first bitcoin futures product of its kind.

In an interview with The Block last month, LedgerX co-founder Juthica Chou said:

“I think at this current time we don’t see the demand growing among really large institutions and banks. We are still a $85 billion market cap for bitcoin — really just the size of a large stock…Right now we see the opportunity towards the other end of the spectrum.”

The market has grown by $200 billion with the run-up in bitcoin’s price. 

But is it fit for institutions?

Still, even within the physically-delivered market, there are variations. Sources say the nature of LedgerX’s license means its contracts are likely to be fully collateralized meaning you can’t legally trade them on margin. This has raised questions about the contracts’ adoption prospects. It will also only offer bitcoin futures initially as opposed to a range of cryptocurrencies. Meanwhile, Bakkt, which is seeking a license to operate as a trust, is preparing to offer a one-month and one-day physically delivered bitcoin futures contract. Bakkt’s contracts will be margined futures, which might be more favorable to more sophisticated investors. 

LedgerX’s Chou said the firm has an advantage over its rivals with its futures product, having traded similar products longer than anyone else, launching in 2014. The firm also already counts over 200 institutions as clients for its physically delivered swaps product.

This post has been updated to clarify that Bakkt’s two futures contracts will be margined.