The marketplace for derivatives backed by digital assets is changing rapidly. But depending on who you ask, that pace of change could either be too fast—or not fast enough.
That was the message shared by industry leaders at FIA's 34th Annual Futures & Options Expo in Chicago on Oct. 18, in a discussion titled "Digital Assets: Emerging Derivatives Products."
Panelists at the event expressed both confidence in the longevity of digital assets and excitement over their roles in the growth of this new asset class. But while much of the innovation in digital assets has been driven by customers and market demand, the same industry experts were quick to caution against the hasty manufacturing of new products simply because they are fashionable in certain circles.
"I don't want to pump the brakes on imagination, but I do want to pump the brakes on implementation," said Thomas Chippas, chief executive officer at ErisX. "We all really have to be self- conscious that we're professionals in a professional industry, and not just be in a race to apply all the innovations simultaneously and instantaneously."
ErisX was recently formed by Eris, an exchange that developed an innovative set of swap futures. ErisX plans to launch physically settled bitcoin futures in 2019, iterating on an existing market for cash-settled bitcoin futures such as those offered by Cboe Global Markets and CME Group.
John Tornatore, global head of cryptocurrencies at Cboe, pointed out the plethora of potential innovations and products that could take shape in digital assets, from options to exchange-traded products. But he cautioned that some people forget "just how hard it is to build a new futures market on a new underlying [asset] like bitcoin."
Tornatore stressed that the performance of Cboe's cash-settled futures over the 10 months since its December 2017 launch has "exceeded our expectations" on the fundamentals like open interest and international demand outside of U.S. market hours. But he cautioned against viewing that simply as a sign to move immediately to the next big thing, or thinking that such milestones are easy to achieve for all digital asset derivatives as a result.
Tornatore said that ultimately the ecosystem of these products will best be served by consistent evidence to both customers and to regulators that there is a "tried and tested and regulated way to transact" in crypto markets.
Nick Goodrich, director of business development at trueDigital Holdings, echoed the importance of serving existing market participants effectively before getting too aggressive with assets tied to other digital currencies or exploring exchange-traded products. That's what trueDigital has done with its recent launch of physically delivered bitcoin swaps.
"We took a step back and asked where is a lot of the spot crypto being traded today, and by and large it's off exchange via OTC counterparties," said Goodrich. Using a CFTC-regulated swap execution facility for bilateral contracts "allows OTC market makers and OTC market participants to use existing relationships." That ultimately helps liquidity both for bitcoin futures and for the underlying digital currency, thus helping this emerging asset class mature and build the foundation for other innovative products in the long term, he said.
The panel participants commented that the introduction of these derivatives is a critical first step to legitimizing the marketplace for digital assets derivatives.
"Let's start getting FCMs to clear these products and figure out to get spot done and be boring for a little bit," said Chippas of ErisX. He said that while many people like to say that this is the first inning of the digital asset revolution, "It's more like the baseball players are just showing up to the field."
A different point of view was expressed by Coinbase, one of the leading U.S. platforms for trading bitcoin and other cryptocurrencies.
Paul Bauerschmidt, product lead for Coinbase Markets, said his digital currency platform is "moving at full sprint" both horizontally by launching trading in additional digital assets like Ether and Litecoin and vertically by incorporating institutional investors and building out related custody services.
Still, he said that even Coinbase has been "hampered in our innovation as the result of the confusion we have" both among consumers and regulators, "so we have to be careful about what we list."
But regardless of the pace of change, one thing all panelists agreed on is that it is an exciting time to be involved in digital currencies, and that while the products may evolve, the asset class itself is certainly here to stay.
"Regulators need to be really aware that this is staying and digital currencies are going to be here in 10 years and in 20 years, so they need to figure this out now," said Trabue Bland, president of ICE Futures U.S., which is also preparing to introduce physically delivered bitcoin futures in the near future.