Written by: Prathik Desai
Translated by: Block unicorn
Whenever I see someone betting on cryptocurrency because of a tweet about X, making money flow, I find it amusing. I have had that experience 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 was.
However, some funds entering the cryptocurrency space cannot be achieved through just a tweet, a podcast episode, or a keynote speech. It requires more than that. Perhaps a memorandum from federal regulators, a risk assessment, and a trustworthy platform would help.
The latest statement from the U.S. Commodity Futures Trading Commission (CFTC) allows spot cryptocurrency products to be traded on exchanges registered with the CFTC, which is precisely what the statement entails.
The CFTC's tacit approval could prompt the most reputable derivatives trading market in the U.S.—the Chicago Mercantile Exchange (CME)—to list cryptocurrencies. If this happens, it will open the doors to the cryptocurrency market, attracting a large amount of funds 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 U.S., and why this is important.
Let's get started.
Long before the seamless financial markets emerged, people were reluctant to engage in financial product trading. The problem wasn't a lack of buyers and sellers; there were plenty of them in the market. The issue was a lack of trust, as everyone worried, 'What if the other party can't pay?'
Today, you no longer have to worry about this. Thanks to the often-underestimated invention of modern exchanges, which establish trust through standardized contracts, mandatory disclosures, and regulatory behaviors. These mature markets incorporate all of this into 'clearing' and 'margin' mechanisms, thereby avoiding the settlement risks that obstruct traders' enthusiasm daily.
Even though everyone is talking about 'trustless' systems, trust is hard to establish in the cryptocurrency market. The latest announcement from the U.S. Commodity Futures Trading Commission (CFTC) might help bridge this gap.
CFTC acting chair Caroline Pham stated, '...listed spot cryptocurrency products will begin trading on a CFTC-registered futures exchange for the first time in the U.S.' Pham expects this move will provide the American public with 'more choices and make it easier for them to enter a safe, 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 look at the data from the Chicago Mercantile Exchange (CME) to understand how significant it could be for the cryptocurrency spot market.
On November 21, the Chicago Mercantile Exchange (CME) set a record for single-day 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 has also reported how much trading activity has shifted into its regulated framework this year. Its year-to-date (YTD) average daily trading volume is 270,900 contracts, with a nominal value of about $12 billion, representing a year-on-year increase of 132%. Meanwhile, the average open interest for the year to date is 299,700 contracts, with a nominal value of $26.6 billion, reflecting a year-on-year increase of 82%.
Even in this scenario, if the Chicago Mercantile Exchange (CME) converts just 5% of nominal trading volume into spot trading, that amounts to $600 million per day. If it reaches 15%, that figure could approach $2 billion per day.
But what advantages does putting spot cryptocurrency and derivatives under the same roof at the Chicago Mercantile Exchange (CME) offer?
Firstly, it shortens the distance between traders' positions and hedges. Currently, many traders place their cryptocurrency exposure in one place while putting their hedge positions in another. They might trade cryptocurrency futures at the Chicago Mercantile Exchange (CME) because it is regulated and cleared, but their spot exposure might come from ETFs, prime brokers, or cryptocurrency exchanges. Jumping between different trading venues may not necessarily increase currency costs but can introduce non-monetary friction. For example, needing to deal with more counterparties increases operational costs and exposure to more risk points.
If a regulated market accommodates both spot and derivatives markets, hedging will become more convenient, and rollover positions will be more efficient. Both parts that traders bet on can be incorporated into the same compliance framework, covering aspects such as margin, reporting, and monitoring.
Those cryptocurrency-native platforms that operate both spot and derivatives—Coinbase (via Deribit), Kraken, and Robinhood—have already 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 buying spot on a cryptocurrency exchange, you consider the asset's price. In contrast, funds buying spot will consider custody, settlement, reporting, and stability under market pressure.
Derivatives exchanges like the Chicago Mercantile Exchange (CME) have already established a system that can enhance market confidence. The clearinghouse, margin system, and monitoring measures provided by CME can offer a regulated safe haven for large fund companies, allowing them to invest safely in the relatively volatile cryptocurrency market during uncertain times.
Hundreds of billions of dollars may flow from large fund companies. Just the U.S. spot Bitcoin ETF issuers hold over $112 billion in assets. Since its inception in January 2024, these issuers have accumulated over $57 billion in inflows.
An ecosystem combining spot and derivatives could encourage some investors to switch from 'holding through funds' to 'trading in the market.' For fund companies, this can bring cost advantages and better control.
ETFs charge fees with the aim of holding the underlying assets. Although they trade similarly to stocks, they still rely on the infrastructure of the stock market during trading hours. For fund companies needing to manage risk and exploit market inefficiencies, they prefer platforms that offer features like all-weather hedging, strict basis execution, frequent rebalancing, or market making.
The third advantage is operational.
The CFTC explained this move as a response to 'recent offshore exchange events' and argued that American citizens should have the right to market access guaranteed by consumer protection and market integrity. The key hidden behind this is leveraged trading. Pham pointed out that Congress had initiated relevant reforms right after the financial crisis and mentioned that Congress originally hoped retail commodity leveraged trading could take place on futures exchanges, but has failed to clarify relevant regulations for years.
Leveraged trading is a breeding ground for the worst events in the cryptocurrency space. Without looking back too far, the most severe liquidation event in cryptocurrency history on October 10 wiped out $19 billion. If leveraged trading can shift to a platform focused on monitoring, margin discipline, and clearing, at least transparency can be improved. At that point, you will no longer face opaque offshore clearing but will have publicly transparent margins, known counterparties, and rules that won't change arbitrarily.
This update has even prompted cryptocurrency platforms to commit to treating retail and large traders fairly.
Soon, the U.S.-regulated derivatives exchange Bitnomial claimed it would provide 'equal and fair treatment' for retail and institutional orders without priority routing.
Considering all factors, the CFTC's move seems promising, as it could make spot cryptocurrency trading easier and more trustworthy, which previously could only be achieved through the flow of large capital.
The CFTC's statement will not turn the Chicago Mercantile Exchange (CME) into a mature spot cryptocurrency exchange overnight. 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 established first through the setting of various safeguards, rather than being achieved by a random tweet about X.
This in-depth analysis concludes here, and we will see you in the next article.
