Bitcoin Futures: From Self-Certification to Systemic Risk

Abstract

On December 1, 2017, the Chicago Mercantile Exchange Inc. and the CBOE Futures Exchange self-certified new contracts for cash-settled bitcoin futures products. The self-certification process allows designated contract markets to list new derivative products one day after submitting in writing to the Commodity Futures Trading Commission (CFTC) that the product complies with the Commodity Exchange Act and CFTC regulations. This Article examines the history of the self-certification process and how it was utilized to list bitcoin futures. It finds that the CFTC had sufficient grounds to halt the self-certification of bitcoin futures despite the CFTC’s claims to the contrary. Specifically, the Article questions the CFTC’s exclusive focus on the potential for the futures contracts to be manipulated when there is ample evidence of manipulation in the bitcoin spot market. The CFTC’s approach in reviewing the self-certifications for bitcoin futures differed from the Securities and Exchange Commission’s (SEC) review of an application to list a bitcoin exchange traded product (ETP). Thus far, the SEC has determined that manipulation in unregulated bitcoin spot markets precludes the ability of a bitcoin ETP to be resistant to manipulation. In allowing bitcoin futures to come to market, the CFTC facilitated the formation of new connections between the regulated financial sector and the unregulated bitcoin spot market. Should the virtual currency market continue to grow, these new connections may one day propagate systemic risk throughout the financial sector and threaten financial stability, similar to what we saw in 2008 when the housing market collapsed. The Article concludes by noting that self-certification is an inappropriate process for listing complex new derivatives and that the financial system would be better served by reverting to the mandatory pre-approval process which existed between 1974 and 2000.

Keywords: bitcoin, CFTC, systemic risk, fintech, manipulation, derivatives, self-certification, virtual currency, SEC

JEL Classification: K22, K23, K20, O38