Article Author: Prathik Desai
Article Translated by: Block unicorn
Whenever I see someone betting on cryptocurrency because of a tweet about X, making funds flow, I find it amusing. I 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.
But some funds entering the cryptocurrency space cannot be achieved with just a tweet, a podcast episode, or a keynote speech. It requires more. Perhaps a memo from federal regulators, a risk assessment, and a trustworthy platform would help.
The latest statement from the Commodity Futures Trading Commission (CFTC) allows the trading of spot cryptocurrency products on exchanges registered with the CFTC, which is exactly what the statement entails.
The CFTC's tacit approval may prompt the most legitimate 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 massive influx of capital from traditional markets.
In today's in-depth analysis, I will explain how this move can channel cryptocurrency 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 emergence of today's seamless financial markets, people were reluctant to trade financial products. The problem wasn't a lack of buyers and sellers; there were plenty of buyers and sellers in the market. The issue was a lack of trust, with everyone worried about 'what if the other party can't pay?'
Today, you no longer need to worry about this. This is thanks to the often-underestimated invention of modern securities exchanges. It builds trust through standardized contracts, mandatory disclosures, and regulated behavior. These mature markets incorporate all of this into 'clearing' and 'margin' mechanisms, thus avoiding the settlement risks that can hinder traders' enthusiasm every day.
Despite people talking about 'trustless' systems, trust is hard to establish in the cryptocurrency market. The latest announcement from the Commodity Futures Trading Commission (CFTC) may fill this gap.
Caroline Pham, acting chair of the Commodity Futures Trading Commission (CFTC), stated, '...listed spot cryptocurrency products will begin trading on CFTC-registered futures exchanges in the U.S. for the first time.' Pham expects this move to provide the American public with 'more choices and make it easier for them to enter the safe, regulated U.S. market.'
This update redefines the boundaries within which the focus of cryptocurrencies 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 may be for the cryptocurrency spot market.
On November 21, the daily trading volume of cryptocurrency futures and options on the Chicago Mercantile Exchange (CME) hit a record high of 794,903 contracts, surpassing the previous record of 728,475 contracts set on August 22 this year.
The market also reported 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, 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, 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 equate to $600 million daily. If it reaches 15%, this number could approach $2 billion daily.
But what advantages does the Chicago Mercantile Exchange (CME) gain by placing spot cryptocurrencies and derivatives under the same roof?
First, it shortens the distance between traders' positions and hedges. Currently, many traders place their cryptocurrency exposure in one place and their hedge positions in another. They may trade cryptocurrency futures on the Chicago Mercantile Exchange (CME) because the CME 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 monetary costs but can introduce non-monetary frictions. For instance, there is a need to deal with more counterparties, incur more operational costs, and face more points of risk.
If a regulated market accommodates both spot and derivatives markets, hedging will be more convenient, and rolling positions will be more efficient. Both parts of the trader's bets can be incorporated into the same compliance system, with margin, reporting, and monitoring included.
Those crypto-native platforms that operate both spot and derivatives—such as Coinbase (which owns Deribit), Kraken, and Robinhood—have already benefited from '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 are concerned about the price of the asset. Fund purchases of spot, however, consider custody, settlement, reporting, and stability under market pressure.
Derivatives exchanges like the Chicago Mercantile Exchange (CME) have established systems that can enhance market confidence. The clearinghouses, margin systems, and monitoring measures provided by CME can offer a regulated safe haven for large fund companies, allowing them to safely invest in the relatively volatile cryptocurrency market during uncertain times.
Hundreds of billions of dollars could 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 cumulatively received over $57 billion in inflows.
An ecosystem that combines spot and derivatives may prompt 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 with the purpose of holding the underlying assets. Although they trade similarly to stocks, during trading hours, they still rely on the infrastructure of the stock market. Fund companies that need to manage risk and capitalize on market inefficiencies tend to prefer platforms that can provide features such as all-weather hedging, strict basis execution, frequent rebalancing, or market making.
The third advantage is operational.
The Commodity Futures Trading Commission (CFTC) explained this move as a response to 'recent offshore exchange events' and argued that the American public should have the right to market access with consumer rights protection and market integrity assurance. The key hidden behind this is leveraged trading. Pham pointed out that Congress initiated related reforms as early as after the financial crisis, and stated that Congress originally hoped that retail commodity leveraged trading could take place on futures exchanges, but relevant regulations have not been clarified 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 caused $19 billion to vanish. If leveraged trading can shift to platforms centered on monitoring, margin discipline, and clearing, at least it can enhance transparency. At that time, you will no longer face opaque offshore clearing but will have transparent margins, known counterparties, and rules that do not change arbitrarily.
This update even encourages cryptocurrency platforms to commit to fair treatment of retail and large traders.
Not long ago, the U.S.-regulated derivatives exchange Bitnomial claimed it would provide 'equal and fair treatment' for retail and institutional orders, without prioritizing routing.
Taking all factors into account, the CFTC's move seems promising, as it may facilitate easy and trustworthy spot cryptocurrency trading, which previously could only be achieved through large capital flow trading.
The Commodity Futures Trading Commission's (CFTC) statement will not turn the Chicago Mercantile Exchange (CME) into a mature spot cryptocurrency exchange overnight. Even if the market moves in this direction, the initial version may be designed to be conservative, with fewer trading varieties, strictly defined leverage terms, and trading channels conducted through existing intermediaries within the CME ecosystem.
This is because trust is always built slowly and gradually. Historically, trust was established through various safeguards, not by a random tweet about X.
This in-depth analysis ends here; see you in our next article.
