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Bitnomial clearing license sets off CFTC vertical integration debate

Commissioners wonder if the CFTC is ready for vertical integration, and if digital assets pose extra risks.

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Source: Cointelegraph

The United States Commodity Futures Trading Commission (CFTC) granted digital asset derivative exchange Bitnomial a clearinghouse license on Dec. 13. Bitnomial already had derivatives exchange and brokerage (futures commission merchant, or FCM) licenses. It has thus become a regulated, vertically integrated market structure. 

The CFTC was acting on an application filed by Bitnomial in April 2022, which was approved by a vote of four to one after several delays. Vertical integration is a controversial practice in unregulated crypto firms. CFTC Chair Rostin Behnam addressed concerns about vertical integration on Dec. 18 in his statement on Bitnomial’s registration:

“Vertically integrated DCOs [derivatives clearing organizations] are not novel structures for the Commission, nor are they in any way designed specifically for a certain asset class. […] Like other registered DCOs, Bitnomial uses a traditional intermediated clearing model that will involve multiple clearing members currently active on the Exchange as FCMs.”

“Currently, the Commission does not have a requirement for addressing affiliate conflicts in its regulations,” he continued.

Commission member Christie Goldsmith Romero disagreed with Behnam and called the Bitnomial registration a precedent, saying:

“The CFTC needed to analyze the risks of vertically integrated market structures, particularly in digital assets, as features of those markets could amplify risk.”

“We should learn the lesson from our consideration of FTX’s application that also sought to change the traditional market structure,” she added. Vertical integration was strongly advocated for in the derivatives market by former FTX CEO Sam Bankman-Fried. FTX US applied to clear margined products without a licensed broker.

Goldsmith Romero was the lone dissenter from the decision to grant Bitnomial a DCO license, but not the only one at the CFTC thinking about the issues she raised. Also on Dec. 18, the CFTC Divisions of Clearing and Risk, Market Oversight, and Market Participants issued a staff advisory on affiliations between designated contract markets, DCOs and or swap execution facilities and intermediaries such as FCMs and other market participants, reminding them of their compliance obligations.

Commissioner Kristin Johnson released a statement calling for a rulemaking on vertical integration to create a “holistic approach” to conflicts of interest arising from it. She discussed both Bitnomail, whose application she supported, and FTX. She pursued the theme further in a lengthy separate statement on DCOs.

Bitnomial founder and CEO Luke Hoersten emphasized the importance of the full array of licenses in a statement released on Dec. 13:

“Our incremental improvements to the platform and operations have been in anticipation of obtaining these additional licenses. […] Now that the licensing process is complete, we can shift our focus to expanding Bitnomial’s product offering and customer base.”

Bitnomial began digital asset margin trading in 2020.

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