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The Introduction of Bitcoin Futures – Expert Legal Opinion

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As  readers likely know, the CBOE and CME are planning to launch Bitcoin futures on December 10 and 18, respectively. Anthony Tu-Sekine, partner with Seward & Kissel LLP, and his team from the firm’s Blockchain and Cryptocurrency Group, provide comment on the legal and operational challenges the introduction of Bitcoin futures may bring.

Anthony and his team frequently advise issuers, funds and financial advisers in connection with cryptocurrency issuances and investments. You can find some initial commentary on the news below:

According to Daniel Bresler, member of Seward & Kissel’s Blockchain and Cryptocurrency Group, “the introduction of bitcoin futures is evidence of the financial industry’s growing acceptance of cryptocurrencies. It also increases the number of market participants that will invest in bitcoin as certain participants were hesitant to invest without the protections given by a respected exchange. Despite these protections, bitcoin futures are still new instruments, which come along with legal and operational questions that will need to be worked out over time.”

Anthony Jew, member of Seward & Kissel’s Blockchain and Cryptocurrency Group, notes, “Interestingly, the CBOE and the CME took a different approach for determining the final settlement price of their respective futures contracts, which may have far-reaching implications for the marketability and the institutionalization of each futures contract, and ultimately the acceptance of Bitcoin as a medium of exchange.

The CBOE took an “equity” style approach, which determines the final settlement price of the CBOE futures contract based on a closing auction that occurs at 4 p.m. Eastern time on a single exchange (Gemini), which is based in the U.S.  The mechanism for determining the Bitcoin final settlement price of the CBOE futures contract is substantially similar to the mechanism used to determining the price for single stock futures contracts, which are also traded on the CBOE.

The CME, on the other hand, took a “currency” style approach, where the final settlement price of the CME futures contract is based on a benchmark reference rate that is calculated in accordance with the International Organization of Securities Commissions’ Principles on Financial Benchmarks and is based off a time-weighted average price over a one-hour trading window.  The final settlement price is determined at the same time as other currency fixings (4 PM GMT) and will include prices from multiple exchanges.

In comparison, both products will have wide institutional appeal, but potentially different audiences.  The CME product might be favored by currency traders, who are familiar with managing risk around other asset classes that have a similar reference price (e.g., fixings for WMR currency rates) or traders outside of the U.S. since its reference price is determined at the end of trading in London.  The CBOE product might be favored by equity traders, who are familiar with the closing auction of U.S. equity markets and a 4 p.m. close in New York.

As trading begins, market participants will be focused on volume, the interaction between each future’s contract trading price and spot (i.e., the CBOE futures price, the CME futures price and Bitcoin spot price) and potential arbitrage opportunities.”

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