A slew of firms — including ErisX, Seed CX, and Cboe — have ether derivatives in the works
But it doesn’t look like regulators are going to approve such products anytime soon
That might have to do with changes coming to the ethereum network
A slew of crypto firms have their hearts set on launching markets for ethereum derivatives, but the chance regulators get comfortable with giving the green light for those products this year seem slim, some market experts say.
“My personal view is that it is 50-50 at best,” Paul Chou, chief executive officer of LedgerX, the crypto options exchange, said in an interview, referring to the odds that an ethereum derivative begins trading in 2019.
Chou’s firm has an ethereum option ready to trade, but it is waiting on the CFTC’s blessing. The agency, which oversees trading in commodity and futures markets in the U.S., put out last month a so-called “Request for Input” to solicit information from market participants that could help the regulator better understand ethereum and the risk potential of derivatives markets built around its native token ether. “The RFI seeks to understand similarities and distinctions between certain virtual currencies, including here ether and bitcoin, as well as ether-specific opportunities, challenges, and risks,” the RFI said.
Across the market, trading firms are planning to launch futures tied to ether. ErisX and Seed CX both share ambitions to launch their own ethereum derivative product. Cboe Global Markets, the exchange operator behind one of the markets for bitcoin futures in the U.S., also has a future for ether in the works. Still, the timeline for when the agency would approve these product hangs in the balance, experts say. The comment period for the CFTC’s fact-finding mission closes in mid-February. Then, the agency is expected to deliberate on merits of ether futures.
“They aren’t hating on ethereum,” said Jeff Bandman, who runs a consultancy firm in the crypto space. Bandman, a former fintech adviser to the CFTC, added: “They understand what a proof of work network is like because that’s how bitcoin works, but proof of stake raises new questions. Specifically, what are the risks?”
Bandman said the agency could wrap things up fairly quickly once the government is up and running again. “It could happen in the first half of 2019.”
Still, Ethereum is in the process of changing the way the network secures transactions from proof of work to proof of stake. The former, which is how bitcoin’s blockchain runs, involves the mining process by which “miners’ compete against each other to solve algorithms to validate blocks and receive reward fees. Proof of stake, however, requires coin holders to “stake” coins — which are subject to loss for improper validation — in order to receive reward fees proportional to the total staked. This week, the crypto was supposed to undergo an upgrade dubbed Constantinople, one step in a series of upgrades slated to go into effect before the full switch to POS.
“There is a lot of uncertainty,” crypto attorney Nelson Rosario said in an interview. “Regulators see this and they think “what exactly are we giving you permission to sell a futures product on.”
The switch to proof of stake could have implications for whether futures tied to ether would trade, says one industry insider. “Staking mimics a derivative product. If you are holding ether as a stake than you are essentially betting it will go up and if you are not you are effectively betting it will go down, at worst, or at best you don’t want it sitting on the network,” he said.
“If you have a future on top of that then you are adding a level of complexity that developers have not worked through,” the person added.
In theory, the person said that adding a future on top of a proof of stake ethereum could add “too many different pressures” on the underlying spot market that would amplify price movement in the underlying. The CFTC hinted at this concern in the RFI, saying “How would the introduction of derivative contracts on Ether potentially change or modify the incentive structures that underlie a proof of stake consensus model?”
There’s also a concern that ethereum might be too centralized. “In my view, there are still outstanding questions about Ethereum’s centralization regardless of Hinman’s opinion. To this day, answers to even simple questions like the initial Ethereum ICO distribution and how much was captured by insiders (like Joe Lubin) remain unclear.”
(where similar improvements to Bitcoin are typically integrated via telegraphed soft fork),” said Arjun Balaji, an analyst and technical adviser to The Block. Still, William Hinman, a director of corporate finance at the SEC, said the crypto in its current state is not a security.
“Ethereum futures is as premature as the bitcoin ETF proposals were two years ago,” Chou said. “We would love to list as many different crypto products as possible. We have the infrastructure.”
A spokeswoman for ErisX declined to comment. Seed CX CEO Edward Woodford said the firm is “excited to launch ether derivative products in 2019, subject to regulatory approval.”
Still, that approval might not come in 2019. “It’s completely uncertain,” one insider told The Block.
by Frank Chaparro