Last November, we warned that bitcoin futures should not be approved. The CFTC decided, however, to go ahead and allow the CME and Cboe to begin trading bitcoin futures due to the fact that the exchanges “self-certified” the contracts. Our warning was based on our suspicion that bitcoin futures prices were reliant on prices generated from the underlying cryptocurrency exchanges which are unregulated. Last November, we wrote:
“We think that the CME knows that the underlying market for bitcoin is very suspect. We think they know that the bitcoin exchanges have been subject to numerous cases of fraud and theft over the past few years. We think they know there is no government regulatory body overseeing the bitcoin exchanges. We think they know that spoofing and layering could be running rampant on these exchanges. So, how does the CME rationalize creating a futures product based on an underlying market of bucket-shop exchanges? They created a reference price known as the CME CF Bitcoin Reference Rate (BRR). This reference price is a volume-weighted average of select five minute time intervals that are provided from only a select number of bitcoin exchanges. The CME noted that weighted-averages were necessary because “bitcoin spot prices have historically varied considerably across trading venues, in particular in times of high volatility.” But just like that, the creation of an index has apparently legitimized bitcoin trading.”
It looks like our warning has proven to be prescient as the Wall Street Journal has just reported that the CFTC is now demanding trading data from bitcoin exchanges to assist in their cryptocurrency price manipulation investigation. The WSJ reported that the CME first requested this complete trading information from the four exchanges (Kraken, itBit, Coinbase, Bitstamp) which generate prices for their CME Bitcoin Reference Rate. These four exchanges then basically told the CME to get lost. The CME then requested a much smaller subset of information which only covered a few hours of data.
According to the WSJ, “The CFTC was upset CME didn’t have in place agreements that would compel bitcoin markets to share trading data tied to futures contracts”. Why didn’t the CFTC make sure the CME and Cboe put these agreements in place before allowing “self-certification”? What was the rush to get these contracts listed? Was the CFTC being lobbied by the CME and Cboe because those exchanges wanted to take advantage of last year’s bitcoin price spike?
It’s no surprise to us that the cryptocurrency exchanges did not want to give up information about their customers since they have no regulatory surveillance and are unsure if price manipulation is occurring. The companies that are proposing crypto ETF’s also know that there might be price manipulation occurring at the underlying exchanges. Last week, we noted that Van Eck had twenty-five pages of risk factors in their newly filed bitcoin ETP proposal including “Fraud and manipulation in the markets for bitcoin may effect the value of the Shares”.
The CEO of SolidX (VanEck’s bitcoin trust partner) took exception to us calling out this fact and sent us a few tweets:
We think that pointing out the fact that you are issuing a product which may be based on fraudulent data doesn’t indemnify an issuer’s responsibilities and it sure doesn’t fix the crypto market price manipulation problem.
The underlying bitcoin exchanges seem to have thought they were exempt from regulatory inquiries. But they didn’t count on the CFTC and the DOJ getting involved. Listen to what one of the bitcoin exchange CEO’s had to say about the inquiry:
“Kraken Chief Executive Jesse Powell said in a statement Friday the CFTC’s “newly declared oversight” of bitcoin prices that drive futures “has the spot exchanges questioning the value and cost of their index participation.” Mr. Powell said in an interview earlier this week that worries about bitcoin market manipulation were exaggerated.“ If there is any kind of attempted manipulation, whoever is doing it is taking a huge amount of risk for very little possible upside,” he said.”
Sorry, Kraken, this is not newly declared oversight. The CFTC has jurisdiction over the CME and the Cboe. Maybe you should have realized this before you agreed to supply price information for the CME reference rate.