Coinfloor, a group consisting of numerous cryptocurrency exchanges for institutional and high net worth investors and traders announced the launch of CoinfloorEX, a cryptocurrency futures exchange in the United Kingdom. The platform will enable hedge funds, traders and others to buy into Bitcoin and other cryptocurrency contracts and operational controls, supported by traditional risk management and governance.
The unique aspect of CoinfloorEX is its physical delivery of the cryptocurrency futures contracts. It is reportedly the first business of its kind in the UK, with systems in place to protect investors and traders against price slippage and market manipulation, arguably the biggest issues facing volatile digital currencies in a relatively new market.
Settlement is determined by physical delivery, rather than index price across various exchanges as is the model in the US with Cboe and CME, thus providing a greater level of pricing transparency, according to the Coinfloor announcement. With access to CoinfloorEX, people will be able to convert Bitcoin to fiat currency after receiving physical delivery. The coins are held in a multi-signature cold storage custody facility to provide additional security, and are subject to monthly solvency audits of the Bitcoin balances to ensure liquidity.
The first contract will launch on April 2018. According to company CEO, Obi Nwosu, “Our mission is to build a bridge between Fiat currency and cryptocurrency to drive the stability and sustainability of cryptocurrency. Numerous market participants are calling on existing cryptocurrency exchanges that provide futures contracts to switch from cash to physical settlement. However, making that transition will be very difficult for them to achieve. We understood this requirement from the start, and have worked for over two years to bring this functionality to market. Now, institutional investors and traders can capitalise on market dynamics, within their own risk parameters and in line with their individual trading strategies.”
As the cryptocurrency market moves towards maturity, definitions of various instruments are likely to be solidified. At present, CME is looking to intervene in a Bitcoin scam case, because of its implications on whether Bitcoin is defined as a commodity, a security, or a currency. Defendants Patrick K. McDonnell, and CabbageTech dba Coin Drop Markets are charged with fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin. In this case, if the court rules that a virtual currency like Bitcoin is not a commodity, then it would jeopardize the CEA and CFTC’s regulatory protections for these commodity derivatives contracts. The CFTC has already defined Bitcoin as a commodity, but according to the CME, “Such a ruling could be interpreted to reverse the CFTC’s determination, and if followed ultimately could raise questions regarding whether CME’s bitcoin futures contract is a valid and regulated futures contract under the CEA.”
With the introduction of Coinfloor’s spot exchange, as well as any new futures contract services that arise in the UK, the US or elsewhere, the CME may have more support for their case that Bitcoin is indeed a commodity. On the other hand, should court rulings decide otherwise, then new challenges will have an immense impact on this new market.