On Monday, the Commodity Futures Trading Commission announced it had approved an application from Cboe, one of the largest U.S. options exchanges, to offer margined futures contracts for Bitcoin and Ether.
At a time when segments of the U.S. crypto industry are retreating offshore amid accusations of “regulation by enforcement,” Cboe Digital president John Palmer described the development as a step forward during a time of uncertainty.
“We’re seeing expansion in the U.S. framework, not contraction,” he told Fortune in an interview on Monday. “This is a really good representation of that hard work across both sides of the fence, both on the Cboe Digital side but also on the regulator side.”
Futures are a type of derivatives contract in which customers speculate on the price movements of assets like Bitcoin and Ether—a common tool for institutional investors, but one that is growing more popular with retail investors, especially in the crypto space.
While Cboe Digital had previously offered crypto futures contracts, it did not allow margin trades. In practice, this has meant traders have had to post the full price of a Bitcoin to buy or sell futures contracts. With margined contracts, they only need to post a fraction initially, requiring less upfront money and allowing for strategies to potentially earn higher returns on that capital.
While other platforms, including the CME Group, also offer margined futures contracts for crypto assets, Palmer said that Cboe’s new approval is unique because it also offers spot trading under the same entity, where users are trading on the current price of assets like Bitcoin and Ether.
As he explained, this arrangement can be advantageous for traders like market makers—who provide liquidity to exchanges—as well as other customers looking for greater efficiencies for other strategies like basis trading, where users look for price differentials between spot and futures contracts.
A departure from FTX
As Palmer explained, Cboe’s model bears a stark contrast to a proposal by the failed crypto exchange FTX, which sought approval for a different approach with the CFTC for futures contracts. With Cboe, users can’t buy futures contracts directly from the platform, but must instead go through futures commission merchants, or FCMs—intermediaries who buy or sell contracts on behalf of clients.
In a 2022 application, FTX sought to cut out the middleman and allow customers to post margin directly to FTX without any brokers. The process, known as disintermediation, was widely criticized by players in traditional finance for giving easier access to risky investment products for retail investors and placing more responsibility in the hands of platforms.
“This is a very traditionally focused model,” Palmer said about Cboe’s approach. “That model has stood the test of time.”
In a statement released after the approval of Cboe’s approval, CFTC commissioner Christy Goldsmith Romero agreed with the sentiment, citing Cboe’s more than 50 years of experience operating exchanges.
“The proposed FTX model was never adopted by the Commission, but it put at risk customers’ bankruptcy priority, other customer protections, and financial stability,” she said.
Crypto’s U.S. future
Cboe’s approval comes at a time when crypto companies including Coinbase and Gemini are moving offshore to launch derivatives exchanges. While Palmer pointed out that their main motivation is to offer a popular kind of crypto derivatives contract still not approved domestically called perpetuals, he lauded regulators’ work in the U.S.
“From our perspective in the U.S., whether there is or isn’t regulatory clarity regardless of who the regulator is, we feel very comfortable working with them to continue to grow the asset class responsibly,” he told Fortune. He described the approval as “a win for the U.S. industry.”
Cboe Digital plans to launch its margined futures contracts for Bitcoin and Ether in the second half of 2023.
