US regulators open consultation on Ethereum

 The US CTFC is opening up a formal consultation on the use of Ethereum and Ether, as it prepares for potential ETH-based futures. 

With the Securities Exchange Commission beginning to flex its muscles in the ICO space, as it begins to crackdown on the issue of cryptocurrencies that serve as Securities, its fellow – and sometimes rival – regulator, the Commodity Futures Trading Commission (CFTC) is now turning its spotlight back on the crypto markets.

First on the list for its examination in this new phase, it would appear, is Ether. The core currency of the Ethereum blockchain is currently the third-placed cryptocurrency by market capitalisation, according to CoinMarketCap.

As reported by Reuters, following an ongoing 2018 discussion between the two regulators – and comments from the SEC hinting that it did not think that Ether fell under its purview as a security due to its level of decentralisation (a stance, it should be noted, that does not exempt all Ethereum blockchain-based ERC-20 tokens used by many ICOs) – the CFTC is now beginning a formal consultation with users of the asset in order to assess exactly how it should handle it as a commodity, as well as subsquent investment products that may base themselves on it.

In its summary on the process, part of the its so-called LabCFTC initiative, the regulator says its ‘Request For Input’ is to “better inform the Commission’s understanding of the technology, mechanics, and markets for virtual currencies beyond Bitcoin, namely here Ether and its use on the Ethereum Network.”

It goes on to say that the body is “seeking public feedback in furtherance of oversight of these markets and regulatory policy development,” so that it can ensure “the integrity of the derivatives markets as well as monitoring and reducing systemic risk by enhancing legal certainty in the markets.”

“The RFI seeks to understand similarities and distinctions between certain virtual currencies, including here Ether and Bitcoin,” it adds, “as well as Ether-specific opportunities, challenges, and risks.”

It begins from a stance of considering Ether as the “fuel” of the Ethereum network and its core functionality – the ability to create smart contracts and task-specific tokens. The consultation, it says, is to better understand “these technologies given Ether’s size in the market and potentially unique attributes relative to Bitcoin.”

It wants, we’re told, “public feedback on a range of questions related to the underlying technology, opportunities, risks, mechanics, use cases, and markets, related to Ether and the Ethereum Network.”

The move can be seen, perhaps, as a pre-cursor to the offering of regulated Ethereum-based futures – in a similar vein to the CBoE and CME-hosted Bitcoin futures contracts already on offer, and name-checked in the RFI document, which allow investors to speculate on the price movements of the cryptocurrency over time and take either a ‘long’ or ‘short’ position depending on their thoughts on how the market will perform. In order for those products to be bought to market, however, the CFTC sought certain crypto-specific “enhancements” be adhered to above and beyond the standard regulations, in order to bet fit the unique issues of dealing with bitcoin; this document, then, will serve to establish any enhancements required for offering similar Ether-related derivatives.

According to the recent Exchange Review from crypto-pricing site, CryptoCompare, the two US-based bitcoin futures products are dwarfed in terms of volume by the similar, but unregulated and often highly leveraged, ‘Swaps’ offered by the Seychelles-based BitMEX exchange.

BitMEX, the report states, currently holds around 95% of the total market for such derivatives in the bitcoin market, while it – and other exchanges around the world – also offer futures connected to other cryptocurrencies, such as Ether. The combined market for those derivatives, at a little over $2bn during the period of the November report, accounted for around 25% of the total crypto trading volumes recorded.

However, despite the CME and CBoE products being relatively niche – even as part of the relatively niche crypto market as a whole – they were, and are, highly influential in the US in shaping the perception of Bitcoin as a maturing asset capable of being packaged in a regulator-satisfactory manner. Similar, regulated, products underpinned by Ether could have the same beneficial PR influence in the eyes of both institutional and so-called ‘Main St.’ consumer investors for that asset too.

The commission welcomes submissions from all parties with concerns on the matter, as well as the general public – there is a sixty day deadline to the RFI, with details to be found here.