DEFINITION of LedgerX
LedgerX is a clearing house specializing in cryptocurrency derivatives. LedgerX is registered as a swap execution facility (SEF) and a derivatives clearing organization (DCO).
Cryptocurrencies have become very popular since the launch of bitcoin in 2009. Hundreds of cryptocurrencies have been created since then, many of which are designed to help finance businesses and projects from which traditional finance could have evaded. This has caused a headache for regulators, who are trying to determine whether the existing rules governing stocks, bonds and other financial instruments will be sufficient to cover digital assets.
Regulators are responsible for ensuring investor protection, but since the rule-making process can take several years to reach a conclusion, they are playing a catch-up game with rapidly changing technologies. For example, it wasn’t until 2020 that the Securities and Exchange Commission (SEC) was able to define when a cryptocurrency token would be considered security.
In July 2020, the Commodity Futures Trading Commission (CFTC) granted LedgerX a derivative clearing agency (DCO) license, allowing it to register as a clearing house for derivative contracts. It took the CFTC about three years to make its decision.
The move from buying and selling individual tokens to derivatives is a major step toward accepting cryptocurrencies as traditional financial instruments. The underlying assets of derivatives cleared via LedgerX will be cryptocurrencies.
Derivatives allow investors to expose themselves to cryptocurrencies without buying a Bitcoin or Ethereum token, just as investors can buy currency futures, stock options, or exchange traded funds (ETFs). This makes investing in cryptocurrencies more affordable, because gaining exposure by buying an individual token could cost the investor thousands of dollars in some cases.
Clearing houses like LedgerX offer a level of transparency, predictability and security for futures and options that is not available in the options offered by non clearing houses. They allow investors to buy or sell cryptocurrency options and calls, which can help reduce the occurrence of wild swings in cryptocurrency values by allowing investors to bet against extremes.
To be successful, LedgerX must attract high contract volumes in order to make investors believe that cryptocurrency derivatives are viable investments. This is no different from exchanges where cryptocurrencies are sold: established exchanges like Coinbase benefit from a virtuous cycle in which their popularity attracts more investors and increases trading volumes, which in turn still attracts more investors and higher volumes. LedgerX reported seeing $ 1 million worth of contracts traded in its first week of operation.
While LedgerX has always been associated with bitcoin trading, its CFTC license allows it to clear derivatives that use other cryptocurrencies as underlying. The candidates for expansion should be well established, with high market capitalizations and a stable technology platform. Initial coin offerings (ICOs), which are used to raise funds outside of more traditional options such as loans, are less likely to be included due to regulatory uncertainty, as the SEC and CFTC are expected to s hear about how to define them.