Any Applications Will Fall Short With CFTC – The Regulatory Body Is Currently Still Writing The Rulebook Crypto Licenses
We are fortunate to have information from the likes of professionals from within the financial and cryptocurrency world, including sources from inside Washington DC cutting through the noise as it relates to the kind of hoops crypto exchanges have to jump through in order to obtain the approval of regulatory agencies as they hunt down the go-ahead to start trading.
Along with the struggles faced by Bakkt and ErisX, these same sources go a long way to outline why there are a number of exchanges that get the proverbial ‘golden ticket' when it comes to streamlined approach towards regulatory approval.
All in all, it's not an easy life operating and serving the digital community as a cryptocurrency exchange. This is especially true when we take into consideration the kind of legal and regulatory hoops that some of these exchanges have to jump through in order to be recognized as ‘legitimate.' One of the more stringent organizations has proven to be the United States, specifically the Securities and Exchange Commission (SEC).
One of the more recent examples of this includes Bakkt, which has begun the quest of successfully obtaining a Trust license, which allows it and its parent company, ICE to operate as a regulated trust. Along with ErisX, which is also undergoing the monumental task of obtaining two licenses – these being the Derivatives Clearing Organization (DCO) and a license for Designated Contract Market (DCM).
While these two companies remain relatively optimistic in the face of these applications for regulatory licenses, they certainly won't be easy to chase up and obtain. If anything, these companies will be involved in months of activity in order to track the progress of their application.
In order to get a better understanding of what is taking place behind the regulatory scenes, there have been a number of reliable sources and legal advisors on the ground floor of policymaking in Washington DC. They've been involved in discussions around what it takes in order to obtain regulatory approval, along with the kind of challenges that the likes of Bakkt and ErisX face.
Crypto Exchanges' Tabula Rasa – And a Whole Lot of Talking and Discussion
“No one has written out the answer” according to those more well versed in the regulatory world, “‘This is what you need to do to get the license',” another going on to argue that these “Companies are going in guessing on the approved architecture.”
This has proven to be a truly slap-dash and, consequently, arbitrary and unfair system for crypto exchanges venturing for regulatory approval.
When it comes to the task of drafting up some kind of regulatory blueprint, the Commodity Futures Trading Commission (CFTC) is not taking any risks when it comes to drafting up its own. This is according to some inside sources like Jeff Steiner.
“The CFTC is going to do on-site examines and ask you to explain things. It is a major process of back and forth. Factor on top of that the fact that that this is something very new and novel to the agency. I think that adds in another layer of diligence. It is not as simple as submitting an application,” Steiner, who works as a partner with the legal firm – Gibson Dunn – Steiner continues, “It takes a really long time, the process is significant. To put it in perspective … if I am coming in and want to start my exchange. I have to have my own rule book.”
This makes a better degree of sense, especially when we take into consideration the kind of long and intensive process the reporting, processing and reviewing of due diligence involves. This includes the kind of comprehensive due diligence and the kind of reviewing that exchanges undergo in particular, according to an inside source.
“The reason for the delay is not because companies are waiting on the SEC or CFTC to make their mind up. It’s that the SEC is in dialogue with the companies, interviewing every single person and seeing every angle.”
Another lawyer that serves with the legal firm Gibson Dunn, Arthur Long further added – “Any bank or trust company is going to have to go through a substantial process so that the regulators understand the business,” in this discussion, Long went on to discuss in more detail Bakkt's intention and plan to obtain a Trust license. According to the news outlet, the Wall Street Journal, the Intercontinental Exchange backed company has been undergoing a longer process of securing its application for a trust, which would serve to further delay the planned launch of its Bitcoin Futures product.
According to Long, Bakkt had initially planned to launch it Bitcoin Futures product in late 2018, but with the process of securing itself as a trust, this may delay the entire process by another 6 months, if that, Long argues.
“Regulators want to make sure the people are running it are capable, and have the right integrity,” he said. “These days with any charter they want to make sure you have the right policy, technology, make sure you can run the business in a safe manner.”
The Pains Of Application
One of the further complications that come with any application for a license by crypto facing organization is the fact that the latter is paying too little attention to the kinds of requests they are receiving from regulatory entities. “They’ve seen countless proposals from big names. And they’re saying ‘come back with something new.’ But applicants are coming back with the same thing or only a few amendments,” another source argues. “They’re still looking for the innovation.”
The same source goes on to further add:
“There’s two big hurdles. One, the lack of creativity in these firms. And two, that they’re fighting against themselves. The market is dragging them down, it’s not done enough maturing.”
“What these people want to see before approving is that the whole industry is ready for it,” the source added.
A further source goes on to note that, in light of the kinds of limitations in terms of resources that crypto exchanges face, “one hiccup can add months” to the final timeline.
Undergoing New Management
The Commodity Futures Trading Commission is also gearing up for a changing of the guard when it comes to its leadership. This specifically relates to its chairman – J. Christopher Giancarlo, who has gained a positive reputation thanks to his friendly approach towards cryptocurrencies, earning him the nickname ‘Crypto Dad.'
Chairman Giancarlo will officially be stepping down at any point between this quarter of 2019 and onto to 2020, with a possibility that this will be taking place during the summer of either year. The timing of his resignation hinges upon when exactly, Mitch McConnell, the US Senate Majority Leader puts it to a vote on the floor. It has alluded to that one of the favorites for the job is the Senior Official from the US Treasury Department – Heath Tarbert.
Another source went on to note that Giancarlo's upcoming departure means that he'll be taking the time in order to bring in some quick reforms before leaving. This may be causing an unforeseen bottleneck too, however, diverting resources to get them passed.
“The chairman has several things he wants to accomplish, so many have had to split their time with the new rulemaking. That has probably slowed the process,” they said.
Either way, the changing of this leadership is not likely to be the most critical element within this equation, as one source alludes to.
“In D.C., you have political appointees sitting at a certain level in the organisation. But those doing the actual groundwork, the people making the decisions are career staffers. So unless someone’s coming in [as chairman] with a totally different point of view, it’s not going to make much of difference,” they said. “In my opinion, the new chairman thing is low hanging fruit.”
With all of this in mind, what are the current odds of these companies being approved?
“Regulators don’t like central points of failure” according to one source, and this is something that will hold up the process for ErisX in the eyes of regulators. But, so long as it can keep these plates successfully spinning, this may be proven wrong. Regardless, this is a concern for regulators.
“ErisX is developing multiple products (ATS, custody). Regulators want to see people specialise in something, and crush it. They don’t want to see someone dispersing resources,” they said.
ErisX has been resolutely working to successfully obtain a DCM license, thereby making them a fully-fledged exchange for cryptocurrency futures like CME or ICE, allowing it to trade through a central limit order book. A DCO operates as a clearinghouse for transactions and is responsible for clearing these futures contract in order to ensure that they are properly executed.
While odds are against the ErisX team for a quick solution to its application, it's multi-tiered strategy may very well pay off.
Bakkt is also pursuing its own license in order to function as a trust as opposed to just obtaining the New York State License for crypto companies, the famous ‘BitLicense.' One of the reasons for this could be, according to Long, the fact that it is a far more ‘expansive' kind of license to pursue. Obtaining a license to operate as a trust company also brings with it a far broader exposure to the world of financial markets by providing advisory services.
“I would put the likelihood of a Bakkt trust license very very high. Not within the next month – but after that, I couldn’t tell you,” Another source goes on to argue.
One of the other routes that is available to the company is that of acquisition, which Bakkt has chosen, thanks to its substantial treasury. “That’s why Bakkt acquired DACC [in Q2]- they’ve got a totally new custody solution,” the source went on to explain.
If this route seems familiar, it certainly is, as it's the same one that Coinbase took in order to expand its reach. The latter, for example, had successfully acquired a group with the support of a South Dakota Trust License.
Coinbase's underlying logic being “once you get South Dakota, you’re pretty much good for everything,” according to the source. This meant that Coinbase took roughly a year in order to be successfully approved. Meanwhile, using an alternative path, like Gemini did, took it approximately 18 months.