BIT BY BIT

A Chicago exchange says bitcoin is here to stay, but it will provide a way to bet against it

Obsession
Future of Finance
Obsession
Future of Finance

Chris Concannon’s career in electronic markets has spanned just about every role, from Securities and Exchange Commission attorney to executive positions at the world’s biggest stock exchanges and at trading firm Virtu Financial. Now, the chief operating officer of CBOE Holdings, which owns Chicago Board Options Exchange, is diving into cryptoassets.

It was only a matter of time until Chicago got in on bitcoin. The city has been coming up with things to trade, like pork bellies or onions, since the 19th century, enabling traders to bet on what prices will be at a later date though futures. Compared with cryptoassets’ nascent infrastructure, futures have time-tested plumbing, like custodians to safeguard assets and futures commission merchants (FCMs) to manage trading collateral. And while regulators may view bitcoin as a potentially dirty money-laundering tool, regulated derivatives are well-known to them.

CBOE is working with cryptoasset exchange Gemini to launch a bitcoin future, which is pending regulatory approval. Quartz spoke with Concannon about bitcoin, trading regulations known as the Volcker rule, and initial coin offerings (ICOs), a mix between crowdfunding and cryptocurrency. The conversation has been edited and condensed for clarity.

Quartz: Is crypto here to stay?

Concannon: Crypto is definitely here to stay. People look at the mining and how it’s created and they question it and say, well, that’s different than any other commodity we’ve ever had. And it’s really not. If you think about the value of the soft metal thing called gold, it’s not all that interesting and there’s not a lot you can do with it. Platinum is probably more valuable from an industrial perspective than gold.

So crypto is being mined, it’s just electronic mining. It’s a unique asset class and it doesn’t get created quickly so it’s kind of precious, similar to a precious metal.

Exchanges are always looking for new products—like pork bellies or orange juice. Are bitcoin futures a big opportunity if you can just figure out the legal entanglements?

We’ll figure them out.

When you talk to institutional firms, whether market makers or big investors, are they still really cautious?

Short term, we’re seeing only the more sophisticated proprietary trading firms that are already trading crypto as an asset class.

When I look at our Hotspot [foreign-exchange trading] platform and the prop traders on that platform and what they’re trading, a number of them are quite active in crypto. It’s encouraging.

There are a number of FCMs that have expressed a great deal of interest. Not only to support the prop traders, but they have external trading clients that have been asking for this for a while.

I was shocked at the number of large investment banks that are restricted from having crypto in their assets, but they’re not restricted from providing access to regulated futures to their clients. So clearly they were feeling demand from hedge funds and others that are closely watching this space.

Speaking of institutional investors—with bitcoin, the provenance can be murky, but if you have futures, it feels like that could bring in the institutional set.

If it’s on a regulated futures market, it then allows for clearing by FCMs. People can touch it and put it in their portfolio, where a lot of crypto is restricted. And also if you think about crypto today, you can’t short crypto, you can’t hedge crypto. This really brings in all the elements of the complete trading world.

Although, again, it’s a new product, you have to launch it, we still have regulatory approvals to get through.

Are those the key factors? Futures are clean and regulated, and the crypto market is far too small for big investors, but with derivatives you can increase that ceiling.

Definitely. Think about crypto for a hedge fund, someone who wants to put real dollars against this asset. You’re talking about crossing multiple markets to get that large exposure. You can’t do it on one exchange. Even Gemini, which is fairly liquid, it’s hard to get that much exposure by just trading in their environment. So you’d have to go across multiple exchanges, which means multiple custodians. And therein lies the challenge—how do you custody your crypto if you want to be an active trader in crypto? Because that means you have to keep it on the exchange that you want to trade on because it’s real time.

This allows them to have a large AAA credit clearinghouse be their counterparty for exposures, and that’s unique and allows them, to your point, to get much larger trades done.

Outside the world of cryptoassets, have things changed for the big market-making traders? For some, their earnings are down. Is there something structural that’s changed?

Definitely not structural. It’s clearly cyclical. Their opportunities structurally continue to improve. Just because we’ve had a change in administration in the US, capital rules aren’t dramatically changing. Risk profiles of our banks aren’t dramatically changing. The concept that large investment banks somehow are going to pile back in and take proprietary market-making positions is just not happening.

So when I look at the profile of a non-bank proprietary market maker, structurally it’s very sound and a great future ahead. Cyclically, it’s kind of quiet.

There is noise coming out of Washington about the Volcker rule and perhaps trying to dial that back. It seems like the administration could water down some regulation. Is that your view?

They’re looking for ways—whether it’s the CFTC, the Treasury, even the SEC—to eliminate certain frictions for capital formation in the markets. But if you think about it, if you just repeal Volcker—which, that’s not really what they’re talking about, probably working around some of the exemptions around Volcker—you’re not changing the risk officer at JPMorgan, at Citi.

They’re not suddenly going to say, let’s put on risk. There’s been a cultural change at the banks as a result of the regulation. I don’t expect dramatic changes from adjustments or a repeal of Volcker.

What’s your take on ICOs (initial coin offerings)? The SEC has issued guidance.

They’re probably getting some complaints about them. That’s typically when they start to get active, and they’ve taken action so to speak and have given warnings. Their view is that they don’t care what form of currency you use, whether it’s crypto or any other tool, if there’s an investment involved it’s under their jurisdiction and very clear laws of disclosure apply.

If it’s small enough there are certain regulations it might fit under, but if it’s truly distributed widely then you could be violative of some very clear laws. They basically fired a warning shot.

There’s a lot of flexibility for ICOs to fit into if they just accept some regulation. A few were just doing their own thing. I think there will still be ICOs in the future, but they will kind of take a step into some of the regulatory realms where they’re allowed to do small company offerings.

Could you see big global exchanges adopting the ICO architecture?

No. If you think about your distribution channel when you’re a large company going public, and think about companies that are going public, it’s not a few hundred million, they’re a few billion now. So IPOs are much bigger than they were 10 years ago. They’re touching such a broad audience of institutions that have restrictions on what they can and can’t use to invest.

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