CME Group's Crypto Assets portal

Written by: Prathik Desai

Compiled by: Block unicorn

Every time I see someone betting on cryptocurrency because of a tweet about X, making money flow, I find it amusing. I have had such experiences too. I remember five years ago, I invested most of my savings for a month into Dogecoin because, well, Elon Musk mentioned it on Twitter. At that time, I didn't even know what cryptocurrency really was.

However, some funds entering the cryptocurrency space cannot be achieved merely through a tweet, a podcast, or a keynote speech. It requires more than that. Perhaps a memorandum from federal regulators, a risk assessment, and a trustworthy platform would be helpful.

The latest statement from the Commodity Futures Trading Commission (CFTC) allows for the trading of spot cryptocurrency products on exchanges registered with the CFTC, which is precisely the content of the statement.

The tacit approval of the U.S. Commodity Futures Trading Commission (CFTC) may prompt the most reputable derivatives trading market in the United States—the Chicago Mercantile Exchange (CME)—to list cryptocurrencies. If this happens, it will open the doors to the cryptocurrency market, attracting significant funds to flow from traditional markets into the cryptocurrency space.

In today's in-depth analysis, I will explain how this move can allow cryptocurrency to flow into the same building that houses the most trusted assets in the United States, and why this is important.

Let's get started.

Long before the seamless integration of financial markets emerged, people were reluctant to engage in trading financial products. The problem was not a lack of buyers and sellers; there were plenty of them in the market. The issue was a lack of trust, with everyone concerned about “What if the other party cannot make the payment?”

Nowadays, you no longer need to worry about this. This is thanks to the often underestimated invention of modern exchanges. It establishes trust by standardizing contracts, enforcing disclosures, and regulating behaviors. These mature markets incorporate all of this into their “clearing” and “margin” mechanisms, thereby avoiding settlement risks that hinder traders' enthusiasm every day.

Despite the widespread talk of “trustless” systems, trust is difficult to establish in the cryptocurrency market. The latest announcement from the U.S. Commodity Futures Trading Commission (CFTC) may help bridge this gap.

Caroline Pham, acting chair of the U.S. Commodity Futures Trading Commission (CFTC), stated that “… spot cryptocurrency products will begin trading on CFTC-registered futures exchanges regulated by the federal government for the first time in the United States.” Pham anticipates that this move will provide “more options for the American public and make it easier for them to access a safe and regulated U.S. market.”

This update redefines the boundaries within which the focus of cryptocurrency may shift, as regulators strive to integrate digital assets into the mainstream market of the world's largest economy.

Just take a look at the data from the Chicago Mercantile Exchange (CME), and you will understand how important it could be for the cryptocurrency spot market.

On November 21, the Chicago Mercantile Exchange (CME) set a new historical record for daily trading volume in cryptocurrency futures and options, reaching 794,903 contracts, surpassing the previous record of 728,475 contracts set on August 22 of this year.

The market also announced how much trading activity has shifted to its regulated framework this year. Its year-to-date (YTD) average daily trading volume is 270,900 contracts, with a nominal value of approximately $12 billion, representing a year-on-year increase of 132%. Meanwhile, the average open interest year-to-date is 299,700 contracts, with a nominal value of $26.6 billion, representing a year-on-year increase of 82%.

Even in this scenario, if the Chicago Mercantile Exchange (CME) only converts 5% of the nominal trading volume into spot trading, that would amount to $600 million per day. If it reaches 15%, that figure could approach $2 billion per day.

But what are the advantages of the Chicago Mercantile Exchange ( CME ) putting spot cryptocurrencies and derivatives under one roof?

First, it shortens the distance between traders' positions and hedges. Currently, many traders have their cryptocurrency exposure in one place while their hedge positions are in another. They may trade cryptocurrency futures at the Chicago Mercantile Exchange (CME) because CME is regulated and cleared, but their spot exposure may come from ETFs, prime brokers, or cryptocurrency exchanges. Jumping between different trading venues does not necessarily increase currency costs, but it does introduce non-monetary frictions. For example, it requires dealing with more counterparties, incurs higher operational costs, and exposes them to more points of risk.

If a regulated market accommodates both the spot market and the derivatives market simultaneously, hedging will be more convenient, and holding positions will be more efficient. The two parts that traders bet on can be included in the same compliance system, with margin, reporting, and monitoring all included.

Those crypto-native platforms that operate both spot and derivatives—Coinbase (which owns Deribit), Kraken, and Robinhood—have benefited from their “one-stop” services.

The second advantage is that it changes the definition of “spot” for large traders.

As a retail trader, when purchasing spot on a cryptocurrency exchange, you consider the price of the asset. However, when funds purchase spot, they take into account custody, settlement, reporting, and stability during market pressures.

Derivatives exchanges like the Chicago Mercantile Exchange (CME) have established a system that enhances market confidence. The clearinghouse, margin system, and monitoring measures provided by CME offer a regulated safe haven for large fund companies, allowing them to securely invest in the relatively volatile cryptocurrency market during uncertain times.

Hundreds of billions of dollars could flow in from large fund companies. Just the U.S. spot Bitcoin ETF issuers hold over $112 billion in assets. Since their establishment in January 2024, these issuers have accumulated over $57 billion in inflows.

An ecosystem that combines spot and derivatives may encourage some investors to shift from “holding through funds” to “trading on the market.” For fund companies, this can bring cost advantages and better control.

ETFs charge fees, and their purpose is to hold underlying assets. Although they trade similarly to stocks, they still rely on the infrastructure of the stock market during trading hours. For fund companies that need to manage risk and take advantage of market inefficiencies, they tend to prefer platforms that can provide features such as all-day hedging, strict basis execution, frequent rebalancing, or market-making.

The third advantage is in terms of operations.

The U.S. Commodity Futures Trading Commission (CFTC) interprets this move as a response to the “recent offshore exchange events” and argues that the American public should have the right to market access with consumer protection and market integrity guarantees. The key hidden behind this is leveraged trading. Pham clearly pointed out that as early as after the financial crisis, Congress had initiated relevant reforms and indicated that Congress originally hoped that retail commodity leveraged trading could take place on futures exchanges, but for many years related regulations have not been clarified.

Leverage trading is a breeding ground for the worst events in the cryptocurrency space. Without going too far back, the most severe liquidation event in cryptocurrency history on October 10 resulted in the loss of $19 billion. If leverage trading could be shifted to platforms centered around monitoring, margin discipline, and liquidation, at least transparency could be improved. At that time, you would no longer face opaque offshore liquidations, but rather have publicly transparent margins, known counterparties, and rules that won't be changed arbitrarily.

This update has even prompted cryptocurrency platforms to commit to treating retail and institutional traders fairly.

Recently, the U.S. regulated derivatives exchange Bitnomial claimed it would provide “equal and fair treatment” for retail and institutional orders without prioritizing routing.

Considering all factors, the CFTC's move seems promising, as it could make spot cryptocurrency trading easier and more trustworthy, something that was previously only achievable through the flow of large capital.

The statement from the Commodity Futures Trading Commission (CFTC) will not turn the Chicago Mercantile Exchange (CME) into a mature spot cryptocurrency exchange tomorrow. Even if the market moves in that direction, the initial version may be relatively conservative by design, with fewer trading varieties, strictly defined leverage terms, and trading channels conducted through existing intermediaries in the CME ecosystem.

This is because the establishment of trust has always been slow and gradual. Historically, trust has been built through the establishment of various safeguards, rather than being achieved through a random tweet about X.

This in-depth analysis ends here, and we will see you in the next article.