The United States Commodity Futures Trading Commission (CFTC) recently granted Bitnomial, a digital asset derivative exchange, a clearinghouse license, marking a significant milestone in the cryptocurrency industry.
Bitnomial, which already held derivatives exchange and brokerage licenses, now operates as a regulated and vertically integrated market structure. While this move has sparked a debate about vertical integration and its potential risks, the CFTC’s decision signals a new era of oversight in the crypto space.
Bitnomial’s approval and vertical integration concerns
Bitnomial submitted its application for a clearinghouse license to the CFTC in April 2022. After several delays, the commission approved the application with a four-to-one vote on December 13th, 2023.
This decision solidified Bitnomial’s position as a vertically integrated market structure, a concept that has been controversial within the unregulated crypto industry.
Vertical integration refers to a company controlling various stages of a supply chain or market process. In digital assets, it involve firms like Bitnomial participating in multiple aspects of the cryptocurrency market, from trading and clearing to brokering. Critics argue that such integration can amplify market risks and conflicts of interest.
CFTC Chair Rostin Behnam addressed these concerns in his statement on Bitnomial’s registration, noting that vertically integrated derivatives clearing organizations (DCOs) are not unique and that Bitnomial utilizes a traditional intermediated clearing model involving multiple clearing members.
Behnam also emphasized that the CFTC’s current regulations do not mandate addressing affiliate conflicts, leaving some members of the commission skeptical about the decision.
Dissenting opinions and calls for regulation
Commission member Christie Goldsmith Romero voiced her dissent, describing Bitnomial’s registration as a precedent that required a thorough analysis of the risks associated with vertically integrated market structures, particularly in the digital asset sector.
She highlighted the potential risk amplification due to unique features of digital asset markets and urged the commission to learn from past considerations, citing FTX’s application as an example.
Former FTX CEO Sam Bankman-Fried had been a strong advocate for vertical integration in the derivatives market. FTX US previously sought to clear margined products without a licensed broker.
While Goldsmith Romero was the sole dissenter in granting Bitnomial a DCO license, her concerns resonated with other members of the CFTC.
On December 18th, the CFTC Divisions of Clearing and Risk, Market Oversight, and Market Participants issued a staff advisory concerning affiliations between designated contract markets, DCOs, swap execution facilities, and intermediaries like futures commission merchants (FCMs).
The advisory served as a reminder of compliance obligations for market participants. Commissioner Kristin Johnson took a step further, calling for a rulemaking on vertical integration to establish a comprehensive approach to conflicts of interest arising from this practice.
She supported Bitnomial’s application but emphasized the need for robust regulations in this evolving landscape.
Bitnomial’s CEO emphasizes license importance
Bitnomial’s founder and CEO, Luke Hoersten, underscored the significance of obtaining the clearinghouse license. He stated that the company had been diligently preparing for this milestone by making incremental improvements to its platform and operations.
With the licensing process complete, Bitnomial intends to expand its product offerings and customer base.
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