Bitpush Exclusive Interview: The Reasons Behind CME’s Decision to Launch Ethereum Futures

The Chicago Mercantile Exchange (CME) has launched its futures contracts for ether (ETH), the native cryptocurrency of the Ethereum blockchain network. CME added Bitcoin futures in December 2017. Now, Ethereum futures are open for trading.

Tim McCourt, Managing Director at CME Group, talks with Bitpush News on the reasons behind CME’s decision to launch Ethereum Futures.

The transcript for the interview can be found below: 

Bitpush: The first question. What is the reason behind CME’s decision to launch Ethereum Futures?
Tim McCourt: That's a great question. When we look at our product development at CME group, it really is largely informed by customer demand, and we got into the cryptocurrency derivative space back in 2017. Over the last 3 years, customers have just been consistently demanding and asking for CME to introduce futures on the Ether-Dollar reference rate which we launched in May of 2018, which is the underlying index, because our future’s contracts is financially settled. It settles in USD. And I would say, when you then look at the kind of increase in excitement and interest in the ETH network, and then therefore, Ether, that's also increased over the last year, so a number of DeFi projects come online. Also, it finally made very good sense for us to offer the futures to enable our current customers and other market participants. Not only the ability to hedge other Ether positions they may have, but also to use it as a way to access the Ether market as well. In terms of the fund, the exposure the contract provides.

Bitpush: Is the reason similar to launch Bitcoin futures 3 years ago?

Tim McCourt: It's similar to an extent where I would say a good number of customers want to use the future’s contract, trading at a regulated futures exchange as a primary access vehicle for the cryptocurrency. And we heard that for Bitcoin, we heard that for Ether.The one thing I will say is different is back in 2015 and 2016 when we were leading up to the Bitcoin futures, given bitcoins relative prominence as the largest token. Bitcoin was a proxy for getting involved in cryptocurrency. In general, people wanted to get involved in this new exciting thing.
I'll see what's a little bit different with Ether is there's very specific interests and demand in the ETH network and Ether, as a token, which is a little bit different, because it's more specific in terms of people wanting to be involved in some of the network of impacts of the specialized finance projects.

Bitpush: Yeah, it is true because Bitcoin it's more like the store of the value, but ETH is a really a financial infrastructure. When did CME decide to launch ETH future? I know the news coming out in last December. But in the internal discussion, when did you first consider to launch the ETH futures?

Tim McCourt: So I would say we probably arrived at the decision a little bit prior to the public announcement, but it's something that we've been validating customers for several months before that. We go through regimented internal decision process where we want to validate the concept in the product design with trading participants, with our clearing members, with our regulator. So there are lots of things that we go through. It's probably a several months long process even before the public announcement. The final decision to launch the contract was a few weeks or a few days before the public announcement, but it's a multi month process.

Bitpush: That sounds cool. For CME, how do you think the crypto market environment is different from three years ago? I know like three years ago when CME first lauched Bitcoin future, it opened a new chapter for cryptocurrency market. 

Tim McCourt: I think probably the biggest change, I would say 2021 versus 2017 or 2018 is the institutional adoption of cryptocurrency trading. That's certainly a story that we can't ignore. And we've seen it happening for a few years. But it's really accelerated the last few months. I think most notably, when we look at the bitcoin futures that trade in Q4 2020, we had a record average daily open interest of about 11,000 bitcoin futures which represents a little over 55,000 bitcoin.
That was kind of a record force, and that was up over 230 % versus Q4 2019. We also in December had a record number of large open interest holders which are those traders that hold a open position of 25 Bitcoin futures or more, which  means 125 or more equivalent bitcoin, because the multiplier is 5 Bitcoin. You then look in January of this year, just last month, it was our record month in terms of average daily volume where we traded over 17,500 contracts per day so, almost 88,000 billion per day, which was up over 60 % versus January of 2020. These are some data points that the and a couple of that with what we're hearing publicly as companies disclosed their either investing in bitcoin or accepting bitcoin or cryptocurrency as payments. There's really this institutional adoption that is accelerating. The way I would summarize is I feel like the conversations we were having around 2017, the launch of Bitcoin Future, was customers were asking us what is Bitcoin? What is cryptocurrency? Now, with the launch of Ether Future, 3 years later, the questions are more around. How much should I be allocating? How should I be trading cryptocurrency? So the questions themselves have also evolved as more and more people have become familiar with cryptocurrency and figure out what it means for their operations and their firms.

Bitpush: That's wonderful. So do you think the institutional adoption is also one of the reason for CME  to decide to launch the Ether futures in last December? Will it be one of the factors?

Tim McCourt: Yes, certainly the success of bitcoin which we think has been very successful also encouraged us to expand into a second digital asset. We also launched bitcoin options just about a year ago in January 2020. So I would say yes, the bitcoin’ success certainly gave us more confidence in expanding our cryptocurrency offering. It really was driven by customer demand. And that demand is coming from both current bitcoin future traders, and market participants, as well as some people who are more exclusively focused on ether that also want to see a future on Ether.

Bitpush: Will CME launch Ether option very soon?

Tim McCourt:  I mean right now, we're focusing on making the futures market for ether as successful as possible. In general, at the exchange, before we introduce options, we'd like to make sure the underlying futures market is developed enough to handle both the delivery of options, which are on seeing these things for futures exchange. We have options on futures. And to make sure the market can handle the associated Delta hedging of options on a daily basis. So we would like to make sure the futures market is developed and robust enough before we introduce options.

Bitpush: Will you foresee CME launch another major cryptocurrence futures in the near future? The third cryptocurrence futures.

Tim McCourt: Again, we'll kind of take our cues from our customers. They are certainly very good at telling us what they need us to focus on. Right now our focus is on bitcoin and recently launched ether futures only being on the second day of trading, but we'll continue to listen to customers. We do think that CME is the natural home for cryptocurrency futures trading, so we'll be working closely with them to figure out what makes sense the product development, but no exact plans right now.
Bitpush:  ETH futures volume reached $33 million on day one. As you said in the interview that the response of ether futures is overwhelmed. Is this surprised to you or is just as you expected?

Tim McCourt：I would say we're very pleased with the day one success. Yesterday we had 388 futures contracts traded on ether futures which is worth 19,400 ether equivalent, because the multiplier for each of futures is 50 ether. So it's a larger multiplier. And that's been great. We're really pleased that success.  In terms of building futures markets, in general, let alone on something that is new and exciting as cryptocurrency for market participants, to  have not only a very good order book in terms of price discovery but also have almost 400 contracts trade with over 230 contracts of open interest established in the first day is a great achievement. I would say it exceeded our expectation.

Bitpush: That's wonderful. But yesterday also the big news is that Tesla spent one $1.5 billion to buy bitcoin. Do you think big companies as Tesla buying bitcoin, will this drive more institutional users or big companies into this crypto market?

Tim McCourt:  It's hard to say exactly what will motivate corporations. Generally speaking, as they look to adopt cryptocurrency for their own purposes, but I think it's not only just Tesla.  

There's been a host of companies that have announced the use about Bitcoin in their treasury functions, allocating part of their capital structure to cryptocurrency as well as accepting cryptocurrency payments. So I think in general, the corporate adoption of cryptocurrency will only further reinforce the use case of cryptocurrency, whether it be bitcoin or other cryptocurrencies. I think that's a general positive development for the ecosystem and will certainly encourage other institutions to figure out if it makes sense for them. 

Bitpush: As someone commented that CME’s ether future will introduce new people and organization to crypto and to the smart contract of ecosystem. So, do you think CME ether future will let more institutional investors to come into this market?

Tim McCourt: It's hard to predict the future. I absolutely believe in the premise and that's part of our hypothesis. When we look at the success we had with introducing institutional accounts into bitcoin by using bitcoin futures at CME, we do believe that trend will also manifest and continue for ether. That's largely because when we look at what CME provides, we provide a regulated venue that is essentially clear to provide market participants a way to manage their risk or to access the underlying market. That is something that a lot of institutions want. They want to transact at a regulated, trusted, efficient venue. 

So, the feedback we have heard there are institutions that are looking to become involved in the trading of ether or invest in ether, but they can't do so in the underlying digital or spot market. So they'll plan to use CME futures the same way bitcoin or other futures that we have at the exchange as well.  I certainly believe that the institutional adoption of ether futures will bring new participants into the ecosystem a little early to tell on day two, but I do believe it will happen, but we just don't have that type of data yet, but certainly we're hearing from customers.

Bitpush: Many people believe the regulatory uncertainty is a potential risk for the crypto industry and crypto market. What does CME think of the current crypto regulation?

Tim McCourt：In general, we're very supportive of the regulation and think regulation as a feature and not a bug of the offering for listed futures in the United States where our primary regulator is the CFTC(Commodity Futures Trading Commission). And I think a collaborative relationship that we have with our regulator. We have in an open and honest dialogue about what we're thinking and how to bring these products to market, and that communication is essential for the product success and development. 

I think it's a very helpful regime and environment to bring products to market, because it gives confidence to those participants that they can trade on a regulated venue in a regulated manner. And that's, like we said, it's a very attractive feature of CME offering. I do think as we look at additional product development, we also would expect that those conversations and dialogue to be ongoing in nature with our regulator and with market participants to make sure that we can continue delivering products that meet the expectations of both our regulators and the market.

Bitpush: Yeah, a lot of people think that it's very positive that CME released bitcoin and ether future.But three years ago when CME launched bitcoin futures, we know that a bear market followed and the price of bitcoin dropped a lot. But this time around ether seems not going to drop a lot after ETH futures lauched.

Tim McCourt：It's hard to say exactly what's gonna happen with the price. What's important to us is that when a buyer or a seller to manage their risk or access the market or manage their positions that they can do so efficiently in transparent and trusted manner. So that's what's really important to us.  I think when you look at the futures market, one of the benefit it provides is that ability to efficiently transfer risk or efficiently manage risk in your positions. 

The prevailing price of the market is always of enormous informational values. The market at large is in fact, where the last buyer and seller agreed to mutually exchange that risk at that price. So even if the price is moving up or down, the efficiency of price discovery is our responsibility to provide, but hard to say what direction, one way or another.

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