Christopher K. Hehmeyer has seen a host of changes in derivatives markets since beginning his career as a runner on the Chicago Board of Trade's trading floor in 1977, but none of them have quite the same disruptive potential as blockchain.
And he's quick to point out the difference between an individual cryptocurrency like bitcoin or ether and the underlying technology of blockchain that makes these instruments possible to begin with.
"There's always going to be talk about bitcoin volatility, but the blockchain technology is what matters—not the products behind it," Hehmeyer said. "Blockchain allows the creation of instruments or assets that are different and interesting. The potential is so much bigger than just bitcoin or bitcoin futures. Most people simply don't fully understand."
That potential includes the digitization of the entire financial system, he said, from legacy asset classes to crypto currencies like bitcoin and ether to products that most investors haven't even dreamed of yet.
But unlike most investors, Hehmeyer has been thinking seriously about crypto and blockchain for years. Through his firm Hehmeyer Trading + Investments, he began bringing on traders, coders and quants to trade and provide liquidity in the over-thecounter spot crypto market to institutions and individuals several years ago. He also sits on the U.S. Commodity Futures Trading Commission's advisory committee that deals with blockchain-related regulatory issues.
FIA's MarketVoice magazine recently spoke with Hehmeyer about the potential and regulatory challenges ahead for blockchain innovation in derivatives markets.
MV: What do you think is the most important feature of cryptocurrency markets that is commonly overlooked?
CH: It's the possibilities. Some of the products that are starting to emerge are like our traditional products, including futures and options on bitcoin that are like derivative contracts on any asset, and those products are starting to proliferate. But blockchain or digital ledger technology is what's really exciting. Bitcoin was just the first asset using blockchain to find enough of a following to support listed futures and options. But since any asset can be tokenized or digitized on the blockchain, the possibilities are endless. There can be "smart" assets that will only settle under certain circumstances or assets that have specific leverage or be available only to certain parties. Anyone who is interested in financial innovation should be enchanted with those possibilities.
MV: Recently, CFTC Chairman Heath Tarbert said ether is a commodity and he expects futures on that cryptocurrency to begin trading in U.S. markets. Do you see that as a meaningful milestone, or given your comments would that be just one of many examples of blockchain's potential?
CH: Right. It's much bigger than just whether or not ether futures get in front of the CFTC. As I mentioned, it's about the digitization of assets—and eventually every asset will get there. We've seen this with equities, with bonds and with debt instruments. And eventually you may even be able to take things like an airplane lease, digitize it and break it up into tokens. Allowing people to own a small piece of it in their Robinhood account [Editor's note: Robinhood is a commission-free online broker]. Every asset has the potential to get digitized and be tradeable by anyone, anywhere.
MV: That accessibility makes me think of recent restrictions on bitcoin and cryptocurrencies in China. Is ease of access a double-edged sword, particularly in Asia where there's a very large retail investing population that could potentially get burned by digital assets like crypto?
CH: There is indeed a large retail investing population in Asia, and as a generalization it may be true that regulators there take seriously the risk of volatility or fraud in retail markets. But the reality is that an active retail investing population exists everywhere, and accessing our markets gets easier every day. Look at Robinhood, who I mentioned before. Or look at Charles Schwab now offering free trading on equities, ETFs and options. I certainly don't want to downplay the challenges the regulators in Asia face as they try to balance innovation while protecting retail investors. But markets are more connected and more global than ever before, so this problem exists everywhere.
MV: How do regulators strike that difficult balance then, between markets that are accessible but also where "the little guy" is protected?
CH: Well, in the U.S. futures on bitcoin or ether is relatively easy. The CFTC chairman called ether a commodity, so there are existing rules for that. But the real challenge is that blockchain technologies will unlock financial products we haven't thought of yet and rules don't apply or exist. These products won't just iterate on older products like securities or commodities, and will not be easily defined. So this is where things get really challenging. Take the stablecoin phenomenon, where a cryptocurrency attempts to offer price stability and is backed by a reserve asset. How do regulators or central bankers in a nation with currency controls deal with assets that don't resemble any product we've seen in the past? I'm honestly not sure.
MV: Is that part of the answer then, simply saying that we don't know because this is new territory and we all need to make a commitment to figure this out together?
CH: Yes, everyone is learning together. These are globalized products because of the very nature of blockchain. I think China or any other government understands that they can't simply outlaw bitcoin in all forms. How would you even practically enforce that? Now, what they can do is regulate the exchanges, which the Chinese regulators have indeed done, and also impose bans on initial coin offerings. Are they being too strict? Maybe, but maybe not. We all need to wait and see. Remember, sometimes control is a good thing like when a local government wants control over a building code to ensure people are safe, or when the G20 collectively puts forth a regulatory scheme that is about reducing systemic risk in the financial system. Regulators in China are doing what they feel is right and we need to learn from that and apply the lessons to other markets and other products. So once again, it's not about China or any specified regulatory regime and it's not about bitcoin or ether. It's about unproven products unlocked thanks to blockchain, and how much control the public wants to have over these young and unproven markets. And of course the answer to these questions will naturally vary from China to Korea to Japan to the U.S. and Europe.
MV: How does your firm, Hehmeyer Trading + Investments, navigate all this regulatory uncertainty in its crypto strategies?
CH: Well, with regards to crypto funds that are regulated commodity pools, there's some regulatory clarity as there are rules for funds that are managed by a registered CPO who is a member with the NFA. But in our spot cryptocurrency counterparty business where we make markets, there is more uncertainty. However, we believe in utilizing best practices in all of our cryptocurrency operations and choose to apply policies and standards above what is required. Remember, our financial system and our system of government are designed to have the regulators move deliberately in many ways because we don't want them to move quickly therefore stifling innovation. Uncertainty stifles innovation like too much regulation. But the lack of regulation can open the door for bad actors.
MV: You sit on the CFTC's Technology Advisory Committee, and have a front-row seat to how regulators are facing the challenges of blockchain. Are you optimistic about where things are headed?
CH: First, let me say regarding the CFTC, I don't ever recall in my career having such smart and dedicated people there. The work is not personal and it's not political, and each and every one of the commissioners are thoughtful and considerate and are trying to make the right decision for the industry. Seeing these good intentions is just a breath of fresh air— particularly in the current political environment. More broadly, working with the TAC and having been on the side of the table of regulators trying to deal with a new phenomenon, I know it's not easy. A regulator has the responsibility of establishing a precedent for an entire community, and they have to be very careful to get it right. With crypto and blockchain, the implications of the wrong regulation are potentially very disruptive. But I will say that from what I've seen, regulators know these technologies are one of the highest priorities for them to explore. So, if they can keep time and attention focused on the issue, then yes, I'm very optimistic. The bottom line is that crypto and blockchain need to be priorities, for regulators and for the industry. These products are potentially disruptive on many fronts, but they are real, they're global and they're here to stay.
About Christopher Hehmeyer
Christopher K. Hehmeyer is the manager and chief executive officer of proprietary trading firm Hehmeyer LLC and its subsidiaries. He is a registered floor broker with the National Futures Association, and served on NFA’s board of directors for nine years. He is the past chairman of the board.
Hehmeyer was one of the founding partners of Goldenberg, Hehmeyer & Co., a futures commission merchant and clearing member firm at the Chicago Board of Trade and CME Group. He was a managing director of Virginia Trading Corporation from 1981 until the establishment of the GHCO partnership in 1984. When GHCO was sold to Penson Worldwide in 2007, Hehmeyer became the CEO of Penson GHCO until 2010.
Hehmeyer became a full member of the CBOT in 1981 and was a member of its board of directors from 1984 to 1987 and served on over 40 committees. He also served on the board of governors of the Board of Trade Clearing Corporation from 1993 until 1999, and as chairman from 1996 to 1998. He began his career as a runner on the trading floor in 1977. Hehmeyer is a member of the board of directors of FIA, where he has served in several capacities, including vice-chairman of the board. In 2018, he was inducted into the FIA Futures Hall of Fame.
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