CFTC Grants Clearinghouse Status to Bitnomial: Embracing Vertical Integration in Crypto Markets
Summary:
The Commodity Futures Trading Commission (CFTC) of the United States has authorized the digital asset derivative exchange Bitnomial to operate as a clearinghouse, adding to its existing licenses as a derivatives exchange and brokerage, thus becoming a fully regulated, vertically integrated market entity. This decision illuminates the ongoing debate about vertical integration within unregulated cryptocurrency firms, risks involved, and the need for a standardized approach to tackle conflicts of interest that may arise from it. These developments indicate a regulatory focus shift to address intricacies within the fast-evolving digital asset market.
On December 13, The Commodity Futures Trading Commission (CFTC) of the United States authorized the digital asset derivative exchange Bitnomial to operate as a clearinghouse. Prior to this, Bitnomial had already been licensed as a derivatives exchange and brokerage (otherwise known as a futures commission merchant or FCM), thereby making it a fully regulated and vertically integrated market entity.
The approval came after Bitnomial filed an application with the CFTC in April 2022, and after withstanding multiple delays, the CFTC gave the green light by a vote of four to one. The issue of vertical integration has been a topic of debate among unregulated crypto firms. CFTC Chair Rostin Behnam addressed the worries associated with vertical integration in his December 18 statement on Bitnomial’s authorization. He clarified that vertically integrated DCOs (derivatives clearing organizations) are not exclusively designed for a particular asset class, and Bitnomial, like other registered DCOs, will implement a conventional clearing model involving various active clearing members.
Rostin mentioned that there are no existing regulatory requirements that oblige an organization to manage affiliate conflicts. However, Commissioner Christie Goldsmith Romero differed from Behnam's opinion, labeling Bitnomial's authorization as a landmark, and stressed the need to examine the risks associated with vertically integrated market structures, particularly in the digital asset sphere, due to their inherent potential to magnify risk. She went on to mention the FTX application, stating that it should have served as a learning experience.
It's worth noting that former FTX CEO Sam Bankman-Fried was a strong proponent of vertical integration within the derivatives market, and his firm FTX US applied for authorization to clear margined products without a licensed broker.
Goldsmith Romero was the only member to dissent from the decision to bestow Bitnomial with a DCO license, though she wasn’t alone in her thoughts within the CFTC. On December 18, the Divisions of Clearing and Risk, Market Oversight, and Market Participants of the CFTC issued an advisory to all associated parties, reminding them of their obligation to adhere to compliance.
In addition, Commissioner Kristin Johnson forwarded a proposal for creating a comprehensive approach to address conflicts of interest that result from vertical integration. She also endorsed the applications of both Bitnomial and FTX, and further commented on DCOs in a separate statement.
Luke Hoersten, Bitnomial's founder and CEO, underscored the significance of securing all the requisite licenses on December 13, and added that with the licensing process now complete, Bitnomial can shift its focus on expanding its product portfolio and customer base. Bitnomial first opened its doors to digital asset margin trading in 2020.
Published At
12/19/2023 10:45:00 PM
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