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Bitnomial Crypto Derivatives Exchange Receives CFTC Approval for First Vertically Integrated Market Structure
Practical Law Legal Update w-041-7688 (Approx. 6 pages)
Bitnomial Crypto Derivatives Exchange Receives CFTC Approval for First Vertically Integrated Market Structure
by Practical Law Finance
| Published on 20 Dec 2023 • USA (National/Federal) |
The CFTC approved the first vertically integrated market structure plan in approving the derivatives clearing organization (DCO) registration application of crypto derivatives exchange Bitnomial Clearinghouse, LLC, which also holds CFTC licenses to operate as a designated contract market (DCM) and futures commission merchant (FCM).
On December 13, 2023, the CFTC approved the derivatives clearing organization (DCO) application of crypto derivatives exchange Bitnomial Clearinghouse, LLC (Bitnomial), the first CFTC-approved vertically integrated market structure plan. Bitnomial also holds CFTC licenses to operate as a designated contract market (DCM) and futures commission merchant (FCM).
Bitnomial is now the only US exchange offering margined, physically delivered digital asset derivatives, meaning customers can receive ownership of digital assets on a leveraged basis rather than just a cash payout at settlement. A vertically integrated market structure allows one party to participate in multiple aspects of the cryptocurrency market, from trading and clearing to brokering.
The vote on the registration application was supported by all CFTC commissioners except Commissioner Christy Goldsmith Romero, who issued a dissenting statement in which she indicated her view that the Bitnomial approval is premature, as all risks associated with a vertically integrated market structure have not been analyzed. Commissioner Romero asserted that:
- The approved structure is how the cryptocurrency industry operates in the unregulated space.
- The Commodity Exchange Act (CEA) and CFTC regulations did not contemplate a vertically integrated market structure.
- Bitnomial does not need this bespoke market structure to clear Bitcoin derivatives, as it has access to clearing services from another exchange, the Minneapolis Grain Exchange.
- Risks and concerns about such a structure have been identified by:
- the White House, in the March 2023 Economic Report of the President (see Legal Update, White House 2023 Economic Report Critiques Crypto Assets);
- Former Federal Reserve Board Vice Chair Lael Brainard, in a June 2022 speech to the Bank of England conference;
- Acting Comptroller of the Currency Michael Hsu, in his October 11, 2022 remarks during the DC Fintech Week; and
CFTC Commissioner Kristin N. Johnson voted to approve the Bitnomial application, but issued a statement after the vote in which stressed the urgency of a contemporaneous rulemaking process to establish regulations that would apply to Bitnomial and all applicants seeking to adopt a vertically integrated market structure.