Sebastian Sinclair

The US Commodity Futures Trading Commission has taken action against three DeFi firms for allegedly violating federal laws relating to digital asset derivatives trading.



In <a href="https://www.cftc.gov/PressRoom/PressReleases/8774-23">orders</a> dated Thursday, the CFTC charged Opyn, ZeroEx and Deridex with allegedly operating unregistered trading platforms and offering illegal leveraged transactions in digital assets. The CFTC announced both charges against and settlements with the three firms.



Specifically, the CFTC said ZeroEx’s DEX aggregator Matcha allowed trading of third-party tokens that offered 2:1 leverage on assets like ether (<a href="https://blockworks.co/price/eth">ETH</a>) and bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>), in violation of federal regulations requiring such platforms to be registered.



In a <a href="https://twitter.com/matchaxyz/status/1699919425225523352?s=20">post</a> on X, formerly Twitter, Matcha downplayed the charges, claiming the tokens identified only constitute roughly “0.1% of Matcha’s trading volume since inception.”



“At 0x, strategic decisions are made with input from outside legal counsel. In this case, we are implementing additional processes after constructive dialogue with the regulatory agency,” Matcha said.



The regulator <a href="https://blockworks.co/news/cftc-risk-watchdog-crypto">previously warned</a> industry participants and projects in May it would be keeping a close watch on new crypto products and services while it beefed up its efforts to <a href="https://blockworks.co/news/cftc-ftc-sue-celsius">pursue cases</a> it found in violation of financial rules.



<h2 class="wp-block-heading">Cracking down on DeFi</h2>



Opyn and Deridex simultaneously have been charged for allegedly failing to register as a swap execution facility or a designated contract market, while also falling short in operating as a registered futures commission merchant. 



Opyn is accused of developing a blockchain-based trading protocol for its digital asset derivative token, oSQTH, without proper registration. Despite attempts to block US users, the company violated federal laws by allowing leveraged transactions and failing to implement a required customer identification program, the CFTC said.



Deridex is accused of illegally offering derivatives via perpetual swaps, a relatively novel idea with roots in the crypto industry. <a href="https://blockworks.co/tag/perpetuals">Perps</a>, commonly referred to in shorthand, operate much like futures contracts but lack an expiration date.



The charges on Thursday potentially expose the US DeFi sector to further crackdowns. Earlier this year, <a href="https://blockworks.co/news/ooki-dao-default-judgement">Ooki DAO</a> lost its court case against the regulator, opting <a href="https://blockworks.co/news/ooki-dao-default-judgement">not to fight it out</a>. Ooki was alleged to have violated certain laws by offering margined and leveraged commodities.&nbsp;



The case drew particular attention after the DAO was served via its <a href="https://blockworks.co/news/cftc-legally-served-ooki-dao-via-website-help-bot-court-rules">online chatbot</a> in an industry first.



“Somewhere along the way, DeFi operators got the idea that unlawful transactions become lawful when facilitated by smart contracts,” CFTC enforcement director Ian McGinley said.



“The DeFi space may be novel, complex and evolving, but the Division of Enforcement will continue to evolve with it and aggressively pursue those who operate unregistered platforms that allow US persons to trade digital asset derivatives.”



While the regulator has taken into account the companies’ cooperation, it has imposed reduced penalties: Opyn, ZeroEx and Deridex have been ordered to pay $250,000, $200,000 and $100,000, respectively. The CFTC has also mandated a cease and desist order against all three.



<h2 class="wp-block-heading">Agency’s actions inconsistent with own strategic plan&nbsp;</h2>



The regulator’s action sparked some criticism.



CFTC Commissioner Summer K. Mersinger <a href="https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement090723">publicly disagreed</a> with the agency&#8217;s enforcement actions against the DeFi projects, advocating for public engagement instead.&nbsp;



She emphasized that such actions mark a substantial shift from the CFTC’s previous stance of seeking dialogue with DeFi market players. 



Mersinger also pointed out that the CFTC&#8217;s 2022-2026 strategic <a href="https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement090723">plan</a> had earmarked DeFi for enhanced stakeholder interaction and regulation based on guiding principles.



“Yet, today’s actions do not promote responsible innovation — they shut it down, banishing innovation from US shores,” she added.



Shalini Nagarajan contributed reporting.



Updated Sept. 8, 2023 at 5:37 pm ET: Clarifies that the CFTC charges have been settled.



Updated Sept. 8, 2023 at 7:44 am ET: Added additional context.



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DeFi projects charged by CFTC over crypto derivatives

Ben Strack

<div id="highlights-block_6307c073fdf3c" class="highlights">
 <ul>
 <li>Company’s near-term focuses include adding margin-based futures contracts, market data tools, executives said</li>
 <li>“We very intentionally established a diverse group of partners,” Cboe Chief Strategy Officer John Deters said</li>
 </ul>
 
</div>



Cboe Global Markets is bringing aboard a slate of equity partners to help grow its digital assets business, just months after closing its acquisition of <a href="https://www.erisx.com" target="_blank" rel="noreferrer noopener">ErisX</a>.



The company is seeking to build out its crypto spot and futures capabilities to fill what executives called “a massive gap” in the space of offering market intermediaries a trusted venue for its retail and institutional clients.



ErisX operates a US-based digital asset spot market, as well as a futures exchange and clearinghouse regulated by the Commodity Futures Trading Commission (CFTC). <a href="https://www.cboe.com" target="_blank" rel="noreferrer noopener">Cboe</a>, which owns the world’s largest options exchange, <a href="https://cms.blockworks.co/cboe-sees-need-to-move-quickly-in-crypto-following-exchange-acquisition/" target="_blank" rel="noreferrer noopener">closed its acquisition</a> of the company in May as a way to enter the digital asset spot and derivatives marketplaces and is set to rebrand ErisX to Cboe Digital.



The new planned partners, each of which intend to take minority stakes in Cboe, are B2C2, DRW, GSR, Hidden Road, IMC, Interactive Brokers, Jane Street, Jump Crypto, Optiver, Robinhood, tastytrade and Virtu Financial. Executives did not reveal the specific size of the stakes.



The investors join other previously announced partner firms, such as Fidelity Digital Assets, Galaxy Digital, NYDIG and Webull. Cboe plans to form a digital advisory committee comprising the partner firms.



The incoming group of partners includes retail order flow providers, some of the largest market makers in the spot crypto world and other market makers focused more on derivatives pricing and trading, Cboe Chief Strategy Officer John Deters told Blockworks.&nbsp;



“We very intentionally established a diverse group of partners,” he said. “It’s that kind of mix which creates, we think, an ideal and healthy blend of participants, each with a little bit different focus and coming together simultaneously to make a vibrant and liquid market.”&nbsp;



<h3 class="wp-block-heading">ErisX and Cboe product roadmap</h3>



ErisX offers cash-settled futures contracts on bitcoin and ether. It offers spot trading on bitcoin, ether, bitcoin cash, litecoin and USD Coin.



In terms of the company’s product roadmap, ErisX President John Palmer told Blockworks that its “next push” is getting CFTC approval to trade margin-based futures contracts. Cboe hopes to roll those products out by the end of the year, he said.



Into 2023 and 2024, the firm will seek to offer additional futures contracts and spot trading for tokens beyond the five digital assets currently offered. Though Palmer did not name specific assets it would seek to offer, it noted that it would be considering other “top-traded tokens.”



“We certainly want to offer that very quickly and have a platform where participants can trade spot and derivatives and really get the benefit of capital efficiencies by having these things all clear at our clearinghouse,” Palmer said.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;



Using market data based on actionable bid and offer prices from the spot crypto market, Cboe Digital also plans on developing a benchmark data stream to help market participants evaluate crypto execution prices, Deters said.



“Our industry is going digital over the long-term, and so making sure that our platform is built for that future, that we’re helping market participants and our clients engage in the market and helping them figure out opportunities to digitizing and interacting with their products is a “mission-critical” initiative for us and will keep us busy for quite a bit of time to come,” Deters said.



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Cboe To Add Slate of Partners to Grow Digital Asset Business

<div id="highlights-block_62ec298cd2be1" class="highlights">
 <ul>
 <li>The Europe, Middle East and Africa region accounts for 28% of total bitcoin and ether futures contracts traded, CME Group exec says</li>
 <li>Daily open interest on CME’s crypto products averaged nearly 127,000 contracts in July — up 59% from the previous month</li>
 </ul>
 
</div>



Derivatives marketplace <a href="https://www.cmegroup.com/" target="_blank" rel="noreferrer noopener">CME Group</a> is set to offer its first euro-denominated bitcoin and ether futures this month after its crypto derivatives <a href="https://cms.blockworks.co/cme-logs-record-crypto-derivative-trades-in-q2/" target="_blank" rel="noreferrer noopener">posted record open interest</a> volumes during the second quarter.



The upcoming cash-settled products are designed to match their US dollar-denominated counterparts. Bitcoin euro futures are set to be comprised of five bitcoins (BTC) per contract, while the ether euro futures are slated to start with 50 ether (ETH).&nbsp;



Tim McCourt, CME’s global head of equity and foreign exchange products, said demand for risk management solutions by institutional investors outside the US is increasing as crypto market uncertainty persists.&nbsp;



Euro-denominated cryptocurrencies are the second-highest traded fiat behind the US dollar, McCourt added. The number of bitcoin and ether contracts traded in Europe, the Middle East and Africa represent about 28% of worldwide totals, he said, which is up more than 5% from 2021.



The upcoming launch comes after CME’s crypto derivatives <a href="https://cms.blockworks.co/cme-logs-record-crypto-derivative-trades-in-q2/" target="_blank" rel="noreferrer noopener">posted record open interest</a> — an average of 106,000 contracts per day — and higher than average daily volumes of 57,000 contracts during the second quarter. 



In July, daily open interest on the exchange’s crypto products averaged nearly 127,000 contracts, a spokesperson told Blockworks, up 59% from the previous month. Average daily volume on those products was roughly 62,000 contracts — about 11% higher than June.&nbsp;



CME began offering bitcoin futures in 2017 and went on to add an ether version in February 2021. The company launched <a href="https://cms.blockworks.co/cme-group-to-launch-cash-settled-micro-bitcoin-futures/" target="_blank" rel="noreferrer noopener">cash-settled micro bitcoin futures contracts</a> — worth 10% of one bitcoin — last year and moved in November to add <a href="https://cms.blockworks.co/cme-group-plots-launch-of-micro-ether-futures/" target="_blank" rel="noreferrer noopener">micro ether futures</a>, as Ethereum liquidity grew. 



“At this time, we have no plans to introduce additional products,” a CME Group spokesperson told Blockworks. “We remain focused on continuing to grow our current suite of crypto offerings.”&nbsp;&nbsp;



Micro ether futures in particular are gaining steam, as more than 3.2 million such contracts have traded in the last eight months, CME Group reported.



Average daily open interest of micro ether futures reached 47,000 contracts in July, while average daily volumes hit nearly 26,000 contracts — up 43% and 41%, respectively, from June.



A CME spokesperson attributed the spike in part to ether’s increasing price, noting that its micro ether contracts settled at $1,014 on June 30. The price of ETH at 3 pm ET was roughly $1,600.&nbsp;



The representative also called <a href="https://cms.blockworks.co/the-investors-guide-to-the-ethereum-merge/" target="_blank" rel="noreferrer noopener">Ethereum’s upcoming Merge</a>, the blockchain’s switch from a <a href="https://cms.blockworks.co/proof-of-work-vs-proof-of-stake-whats-the-difference/" target="_blank" rel="noreferrer noopener">proof-of-work consensus mechanism</a> to a proof-of-stake alternative, “one of the most anticipated events in the crypto space to date.” 



The spokesperson said 78% of micro ether options open interest mature in September or December, suggesting traders are hedging risk ahead of the Merge.



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CME Group Rolling Out First Euro-settled Crypto Derivatives

<div id="highlights-block_62e18632d4166" class="highlights">
 <ul>
 <li>Average daily open interest across CME Group’s crypto products hit 106,000 contracts</li>
 <li>The average daily volume for ether futures was up 27% from the prior quarter</li>
 </ul>
 
</div>



CME Group’s crypto derivatives posted record open interest and higher than average daily volumes during the second quarter — even as the sell-off in digital assets markets intensified.  



Average daily open interest across its crypto products was 106,000 contracts, an all-time quarterly high, according to a report published by the derivatives exchange Wednesday. Average daily volume was about 57,000 contracts — the second-highest quarterly total.



Ether futures, in particular, notched an average daily volume in the second quarter of 6,600 contracts, an all-time high that was up 27% from the first quarter. A record 26,500 contracts traded June 15.



During the third week of June, the combined number of what the company calls large open interest holders for <a href="https://cms.blockworks.co/tag/CME-group/" target="_blank" rel="noreferrer noopener">CME Group</a>&#8216;s crypto futures reached a high of 404, signaling growing interest from institutional investors. 



A CME Group spokesperson did not immediately return a request for comment.



Futures contracts are legal agreements to buy or sell a particular asset at a predetermined price at a specified time in the future. CME futures are dollar cash-settled and are based on a once-a-day reference rate of the underlying asset’s price.



CME began offering bitcoin futures contracts in 2017 and later added ether futures in February 2021. It <a href="https://cms.blockworks.co/cme-group-to-launch-cash-settled-micro-bitcoin-futures/" target="_blank" rel="noreferrer noopener">launched</a> cash-settled micro bitcoin futures contracts — worth one-tenth of one bitcoin — last year and <a href="https://cms.blockworks.co/cme-group-plots-launch-of-micro-ether-futures/" target="_blank" rel="noreferrer noopener">moved in November</a> to add micro ether futures, as liquidity in ether futures grew. 


<div class="wp-block-image">
<figure class="alignright size-medium"><img loading="lazy" decoding="async" width="300" height="222" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/06/McCourt-Tim-UPDATED-300x222.jpg" alt="Tim McCourt, CME Group" class="wp-image-4947" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/06/McCourt-Tim-UPDATED-300x222.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/06/McCourt-Tim-UPDATED-300x222.jpg?w=347 347w, https://blockworks-co.imgix.net/wp-content/uploads/2021/06/McCourt-Tim-UPDATED-300x222.jpg?w=352 352w, https://blockworks-co.imgix.net/wp-content/uploads/2021/06/McCourt-Tim-UPDATED-300x222.jpg?w=295 295w, https://blockworks-co.imgix.net/wp-content/uploads/2021/06/McCourt-Tim-UPDATED-300x222.jpg?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2021/06/McCourt-Tim-UPDATED-300x222.jpg?w=680 680w" sizes="(max-width: 300px) 100vw, 300px" /><figcaption>Tim McCourt, CME Group</figcaption></figure></div>


More recently in March, CME rolled out <a href="https://cms.blockworks.co/cme-group-to-roll-out-micro-bitcoin-ether-options/" target="_blank" rel="noreferrer noopener">options on micro bitcoin and ether futures</a>. Tim McCourt, CME’s global head of equity and foreign exchange products, at the time said the new offering would allow traders of all sizes to manage crypto market exposure with more precision.



The first bitcoin futures-based ETFs <a href="https://cms.blockworks.co/first-bitcoin-futures-etf-nears-1b-on-first-day-of-trading/" target="_blank" rel="noreferrer noopener">hit the market last October</a> after SEC Chair Gary Gensler had <a href="https://cms.blockworks.co/sec-chair-gensler-prioritizes-crypto-platform-crackdown/" target="_blank" rel="noreferrer noopener">hinted in August</a> that the agency would be more comfortable with products limited to CME-traded futures contracts. The SEC has not yet approved an ETF that invests in crypto directly.



Simeon Hyman, head of ProShares’ investment strategy group, <a href="https://cms.blockworks.co/proshares-exec-bitcoin-futures-etf-a-real-robust-and-first-class-solution/" target="_blank" rel="noreferrer noopener">told Blockworks</a> earlier this month that daily volume in the firm’s Bitcoin Strategy ETF (BITO) has eclipsed that of the Grayscale Bitcoin Trust (GBTC). He noted ​​a futures-based ETF is “not at all a second-class citizen” when considering challenges in the spot market.



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CME Notches Record Crypto Derivative Trades in Q2

<div id="highlights-block_6185703796c2e" class="highlights">
 <ul>
 <li>Eventual normalization of monetary policy and investors’ greater focus on ESG could hurt bitcoin’s outlook</li>
 <li>Stiff competition from similar layer-1s like Solana is a disadvantage for Ethereum that bitcoin does not endure</li>
 </ul>
 
</div>



Ethereum (ETH) could continue to benefit from the sharp growth of decentralized finance, while the eventual normalization of monetary policy could put downward pressure on bitcoin’s “digital gold” proposition, according to recent research from JPMorgan.&nbsp;



Ethereum’s all-time price high this week of more than $4,600 came as CME Group announced <a href="https://cms.blockworks.co/cme-group-plots-launch-of-micro-ether-futures/" target="_blank" rel="noreferrer noopener">plans to launch micro ether futures</a> next month and Facebook’s upcoming name change to Meta. The latter announcement boosted ether, given that several metaverse platforms are already based on the Ethereum platform.



The crypto asset’s price was $4,500, as of 2 pm ET on Friday, according to <a href="https://www.coingecko.com/en" target="_blank" rel="noreferrer noopener">CoinGecko</a>, up 0.4% in the last 24 hours.



“There is little doubt that momentum traders have amplified the recent rise in [ether] prices, but we find no evidence on our metrics as yet that momentum signals are in overbought territory,” according to a Nov. 3 note by JPMorgan analysts, led by Nikolaos Panigirtzoglou.&nbsp;



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“Instead, the renewed enthusiasm about Ethereum appears to have been less technical and more fundamental, driven by investors’ excitement about metaverse and virtual reality applications following Facebook’s announcement.”</blockquote>



Since its launch in February, CME ether futures have seen a steep upward flow trajectory underpinning this year’s ether bull market, analysts said, as the number of contracts has risen to 6,500, representing about $1.5 billion. The micro futures offering is expected to bring participation from a broader set of investors.



Though Ethereum’s blockchain dominance in the smart contract, DeFi and NFT spaces has increased its appeal to both institutional and retail investors as the leading application cryptocurrency, it faces stiff competition from other blockchains, a separate JPMorgan report published last week states. These competitors include the Binance Smart Chain (BSC), Polkadot (DOT), Cardano (ADA), Terra (LUNA) and Solana (SOL).&nbsp;



<h3 class="wp-block-heading">Ethereum versus bitcoin</h3>



Digital currency prime broker Genesis noted in its <a href="https://cms.blockworks.co/genesis-reports-continued-growth-in-demand-for-eth-compared-to-btc-in-q3/" target="_blank" rel="noreferrer noopener">third quarter report</a> that though demand for Ethereum outpaced demand for bitcoin during Q3, layer-1s such as SOL, LUNA, Avalanche (AVAX) and Fantom (FTM) reduced Ethereum’s market share.&nbsp;



“This [competition] creates the risk that the substantial increase in the Ethereum network activity over the coming years embedded in the current price of $4100 might not materialize,” JPMorgan analysts explained.



Meanwhile, bitcoin is unique in terms of investors viewing it as digital gold, and faces no competition from other cryptocurrencies, the research notes.&nbsp;



The rise in bond yields, however, and the eventual normalization of monetary policy is putting downward pressure on bitcoin as a form of digital gold, the same way higher real yields have been putting downward pressure on traditional gold, the analysts said.



Tapering of monthly bond purchases at a reduction of $15 billion a month will soon begin due to the “substantial further progress” of the economy, Federal Reserve Chairman Jerome Powell <a href="https://cms.blockworks.co/fed-to-begin-tapering-this-month-bottlenecks-will-persist-well-into-2022/" target="_blank" rel="noreferrer noopener">said on Wednesday</a>. He noted that the central bank elected to keep interest rates near zero.



“With [ether] deriving its value from its applications, ranging from DeFi to gaming to NFTs and stablecoins, it appears less susceptible than bitcoin to higher real yields,” the JPMorgan report states.



In addition, the analysts pointed out that investors’ focus on environmental, social and governance, or ESG, issues has shifted attention away from the energy-intensive bitcoin blockchain to the Ethereum blockchain, which is expected to become more energy-efficient by the end of 2022 with Ethereum 2.0.



Yassine Elmandjra, a blockchain and crypto-asset analyst for Ark Invest, said in a tweet that Ethereum’s market capitalization would ultimately grow larger than bitcoin’s.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">will happen and it&#39;s ok&mdash; Yassine Elmandjra (@yassineARK) <a href="https://twitter.com/yassineARK/status/1456330260367216647?ref_src=twsrc%5Etfw">November 4, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Bitcoin’s price was 61,175 as of 2 pm ET on Friday, CoinGecko data showed — a 0.3% decrease from a day ago. Its market capitalization is nearly $1.2 trillion, which is a bit more than double the market cap of Ethereum.&nbsp;



“In a scenario where the volatility of bitcoin subsides next year to about twice the volatility of gold,” the analysts said, “a bitcoin price target of $73,000 seems reasonable for 2022.”