Why Big Banks are not willing to support the launch of Bitcoin Futures

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When Bitcoin futures were first introduced by CBOE and CME, many of the big banks showed disinterest. Some of the biggest names in banking, namely JPMorgan Chase and Citigroup, refused to clear bitcoin futures trades for their clients. Interestingly, rather than provide an immediate explanation, initial reports of responses indicated that there were no comments.

The reasons for their hesitancy should have been clear considering the noise coming from the financial and banking industry. When CBOE Global Markets Inc’s futures exchange and CME announced their intention to offer bitcoin futures, the banks and brokers alike began wringing their hands. Their main reasons were not that difficult to pinpoint. Concerns about the wide volatility and speculative nature of cryptocurrencies made up a significant part of the concerns. Some of the rhetoric of market bubbles and the like were trotted out, despite brokers rarely preventing trading in a fizzing market.

The CEO of JPMorgan Chase, Jamie Dimon, was particularly outspoken against the futures, stating that bitcoin is a “fraud”. He went on to state that anyone “stupid enough” to purchase it will ultimately “pay the price for it one day.” More measured voices quickly joined the fray. Greenwich Associates analyst Richard Johnson, despite being a Bitcoin supporter and trader, said “I‘m kind of taken aback by what’s happened in the last three months. I‘m concerned things are moving a bit too quickly.”

Johnson’s comments hint at the real underlying issue for the banks. There is significant concern that the current state of the Bitcoin market, a market dominated by cryptocurrency exchanges that do not have adequate oversight, or in some cases even basic oversight, leaves the currency open to substantive manipulation.  When Johnson was voicing his concern for the speed of movement, it was not because of the fluctuations or concerns of a bubble, it was the legitimate concern that creating a future that does not have proper oversight at a basic level is dangerous.

Much of the underlying noise surrounding the industry’s response to bitcoin futures focused on the process of bringing bitcoin futures to market, lamenting the lack of consultation on critical matters like margin levels, trading limits and manipulation. The Futures Industry Association (FIA) penned an open letter on the subject stating “We remain apprehensive with the lack of transparency and regulation of the underlying reference products on which these futures contracts are based.”

Whilst the huge growth in value throughout 2017 has created a significant upswing in trading of Bitcoin, the addition of futures creates yet another market to surround the current infrastructure. So, when JPMorgan Chase global markets strategist Nikolaos Panigirtzoglou talks about futures as having the “the potential to add legitimacy” to Bitcoin, it contains in it the kernel of a warning.

In many ways, the current fraction over futures is not surprising. It is the nature of paradigm shifting that gives rise to such schisms. CBOE and CME know very well the limitations of the current infrastructure. They, like the NASDAQ, which has plans to also provide Bitcoin futures in 2018, have high criteria of entry and heavily policed trading environments. But a new paradigm always creates a dissonance between those that hail it as the next big thing, and are keen to be first in, whilst others sit back until it becomes the new normal. Unfortunately, this great divide also exists in bubbles, where those same early birds are the ones that choke on the worm.

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