Innovation, Regulation and Education
“Let’s talk about blockchain and cryptocurrencies,” said Matt Kluchenek, Partner at Baker McKenzie, at an Executive’s Club of Chicago luncheon on May 22nd looking at Chicago’s role in the digital currency movement. He was joined on stage by Sunil Cutinho, President of CME Clearing, Peter Johnson, Vice President of Jump Capital and Michael Unetich, Vice President of Cryptocurrencies at Trading Technologies.
A Primer and Aha Moments
While about 75% of the audience owned at least one cryptocurrency, there were other attendees that did not have much knowledge of the crypto craze. Kluchenek asked the panelists to give quick primers on the topics.
“The value of blockchain is that you can store something permanently and digitally in a safe way through various technologies. This includes cryptography and peer to peer networks,” said Unetich, about the technology behind cryptocurrencies. "It is censorship resistant, borderless, and trustless."
Johnson stressed the decentralized nature of the technology.
“A cryptocurrency is a unit of value that is being transferred on those rails and what is unique is that they let value be transferred without an intermediary,” he said. “The previous owner signs it and transfers it. What we call ‘miners’ stamp transactions every few minutes and a consensus validates the transfer.”
Cutinho recommended the audience learn more about the initial problem that bitcoin was trying to solve.
“I recommend studying what money is and the initial problem that bitcoin was trying to solve, which is maintaining that unit of account,” he said. “Money needs some authority to provide credibility and the innovation behind bitcoin is that. For the first time it is able to maintain a single ledger to keep that unit of account.”
Kluchenek also wanted background information on what first got the panelists interested in cryptocurrencies.
“For me, my aha moment was about a year ago. I was an interest rate trader but the interest rate markets weren’t exciting and cryptocurrencies came across my desk,” said Unetich, who admits he needed a few resources to help him get over the hump. “I recommend the documentary Banking on Bitcoin and a book called Digital Gold.”
Cutinho distinctly remembers an internal discussion at the CME Group in 2014.
“This was when we started talking about what cryptocurrencies mean for financial services and we looked at it from three perspectives. There is cryptocurrencies, the product itself, the data and the underlying technology,” he said. “In this world, we are meant to decentralize or remove intermediaries when people transact with each other. However, we thought there will be a need for an independent party to validate the prices.”
Peter Johnson is one of a few institutional investors in this space. He turned his attention to cryptocurrencies in 2013 when bitcoin prices spiked 350% due to the crisis in Cypress and the uncertainty around Europe’s banking community.
Barriers for Institutional Investors
“There are two things holding the institutional investors back and one of them is regulatory clarity. There is a hesitancy to invest because of the uncertainty,” Johnson said. “The second factor focuses on the infrastructure around this new asset class. Compliance, custody and surveillance, for example, are things people are working on and we will have great solutions but we aren’t there yet.”
Cutinho sees a mix of retail and institutional players leveraging the CME’s bitcoin contract but agrees that institutional investors are hesitant to get into this space.
“We launched these contracts because our community, who holds bitcoin, didn’t have an opportunity to hedge. Also, we took into consideration the miners who have costs in dollars. They have to pay for so many services such as power and hardware in fiat, but they get paid in cryptocurrencies. As a result, the CME and CBOE, created an opportunity to hedge that risk,” he said.
Since regulation is a big factor holding institutional investors back, Kluchenek wanted to explore the topic.
“There are a lot of regulators saying different things,” he said. “The CFTC says they are commodities, the SEC is calling ICO’s a security and the IRS treats digital currencies as a property – how does this impact your business?”
Cutinho believes that regulation is good for the cryptocurrency market.
“If you go back in history and look at markets, having transparency when you are dealing with customers is a good thing,” said Cutinho. “I applaud the CFTC for taking a lead here because they are making sure these markets are regulated and transparent and there is nothing wrong with that.”
However, Johnson confirmed that we need clarity and regulation, not new legislation.
“BitLicenses in New York were more harmful than helpful,” he said, referring to a business license for virtual currencies that the New York State Department of Financial Services introduced in 2014.
Chicago’s Role in the Bitcoin Boom
New York was brought up again when Cutinho touched upon Chicago’s history of innovation.
“Chicago has always had an innovative streak. This goes back to 1972 when the CME launched futures contracts on foreign exchange and the New York guys were like how could an exchange that trades wheat and pork bellies launch this type of futures contract?” he said. “We are focused on the markets in general and have a unique ecosystem of players that makes Chicago a financial standout.”
Johnson believes Chicago’s stance in the markets will only grow from here as trading firms, exchanges and other service providers help develop this new asset class.
“Jump Trading was an early and large trader in the crypto market. CBOE and CME got in quickly with bitcoin products. Then we have Trading Technologies and other technology providers servicing the cryptocurrency markets,” said Johnson. “That concentration of power is attracting companies like Coinbase and Kraken to Chicago and I believe we are going to see more crypto firms attracted to our city, our volumes and our power.”
While the panelists believe that Chicago is at the frontier of the cryptocurrency movement, they also believe that a slower pace of growth is okay. Development of infrastructure and clarity around regulation will help bring institutional funds into this space and further help evolution.
Unetich also believes education will play a big factor.
“You might be confused about bitcoin and blockchain,” said Unetich. “There is a lot of education that needs to come about so it’s okay that this market is moving slowly. This is not something that can be rushed into so the speed might be tricky but it will all end in a good way.”