ErisX Addresses Challenges Faced, Milestones Reached in 2020 as well as Opportunities Ahead in 2021
ErisX reached many milestones in 2020 toward driving crypto market maturation. Midway through the year we wrote about our accomplishments including the launch of the first U.S. based Ether Futures contract, our Block Trading capabilities, and our New York Virtual Currencies License (BitLicense), among other noteworthy milestones. Below we recap the full year including a slate of announcements from this month and a preview of what’s to come in 2021.
ErisX’s Progress on Market Volumes
ErisX launched a crypto spot market in April of 2019 and its futures exchange and clearinghouse in December of 2019. ErisX’s investors include a number of prominent market makers and intermediaries. Industry watchers anticipated that ErisX, and its backers, would help grow the market by making it more accessible to mainstream investors. Yet trading volume to date has been muted. We firmly believe that our intermediary-friendly go-to-market is the long term winning strategy. However, our timeline and expectations have necessarily evolved in response to a number of market realities and events including a major pricing shake-up and M&A activity in the US retail brokerage industry, and the global pandemic.
In the Fall of 2019 retail broker Charles Schwab announced plans to eliminate commissions on equity trades, a move quickly followed by TD Ameritrade, ETrade and Fidelity. Shortly thereafter Schwab also announced plans to acquire TD Ameritrade and Morgan Stanley announced plans to acquire ETrade. These unexpected events had an impact on priorities and focus for the retail brokerage industry.
The direct B2C theme in ErisX’s latest product launches is a response to the uptake from more traditional market players, which is slower than anticipated. Our technology, operations, and licensing allow us to onboard individuals directly, including at our futures exchange. This is not conventional for regulated exchanges and clearinghouses and a strong competitive differentiator for our business. It has allowed us to nimbly shift to onboarding individuals and crypto native institutions directly in the near term, while remaining strongly positioned to serve traditional institutions and intermediaries as more and more become ready. In the meantime we have seen strong recent growth in our spot volumes and early interest in our Bounded Futures contracts (discussed further below).
Physically settled contracts enable firms and individuals that want to own the underlying to trade on a fully regulated market with all the associated protections of market surveillance and oversight. Our physically settled BTC and ETH contracts have seen very little trading since they were launched. This is not unexpected. Fully funded contracts are not as capital efficient as margined products. We launched our clearinghouse fully funded as the first stage and have plans to add margin capabilities in 2021 (discussed further below).
Recent statements made by well known traditional investors such as Ray Dalio, Founder and Co-CIO of Bridgewater Associates, “So [bitcoin] could serve as a diversifier to gold and other such storehold of wealth. The main thing is to have some of these types of assets (with limited supply, that are mobile, and that are storeholds of wealth,)” or Larry Fink, CEO of Blackrock, “Bitcoin has caught the attention and imagination of many people…cryptocurrency could possibly evolve into a global market asset,” are examples that, as expected, institutional sentiment is beginning to shift. Additional proof is in the entrance of players such as; PayPal, Mass Mutual, One River Asset Management and Square. Such institutional firms require well-run, regulated markets like ErisX.
ErisX’s Progress on Our Intermediary-Friendly Strategy
We believe intermediaries are critical to the long-term growth and mainstreaming of the crypto market. This year ErisX worked with institutional investors, intermediaries, and regulators to craft a surveilled, fair, secure and professionally-run market center. Intermediary participation in crypto will happen in steps and stages. We realized some important milestones this year with the announcements that Fidelity Digital Assets and TradeStation Crypto are live and providing access to our spot market for institutional and individual customers, respectively. We also announced the rollout of our block trading capabilities to enable institutions to trade large blocks of cryptocurrency without settlement risk. Our membership in Silvergate Bank’s Silvergate Exchange Network (SEN) enables ErisX Exchange Clearing Members to make nearly instantaneous U.S. Dollar Transfers.
ErisX’s Progress on Crypto Regulatory and Compliance Initiatives
At the state level, in 2020 we added six licenses to bring our total to 51, including the New York Virtual Currencies License (BitLicense) and participation in a two year pilot program by the State of Hawaii’s Digital Currency Innovation Lab.
At the federal level the Commodity Futures Trading Commission’s Market Participants Division’s (formerly the Division of Swap Dealer and Intermediary Oversight) published guidance regarding the deposit of virtual currencies, on October 21. In response to the guidance, we organized a webinar with Delta Strategy Group, Katten and RSM to offer a practical analysis of how FCMs can hold crypto in their customer accounts.
We received approval for an amendment to Eris Clearing’s Derivatives Clearing Organization (DCO) license that expands our clearinghouse capabilities to clear any futures and swaps products on any commodity. Previously, our license had only permitted us to clear futures on cryptocurrencies. With the amended DCO, we were able to file a product self-certification to introduce fully-collateralized, financially settled sporting event-based futures contracts in collaboration with RSBIX.
Finally, on December 7, 2020 ErisX filed its application with the CFTC to expand the capabilities of its DCO to offer margin. Margin, along with recent guidance from the CFTC DSIO and AICPA clarifying the treatment of crypto assets for regulatory reporting and accounting purposes, further clears the path for FCMs to enter the market.
ErisX’s Progress on Trading Products
2020 has been a busy year for ErisX product and pricing releases. We rolled out real-time rebates including our Paid to Rest program. By keeping passive, competitive orders on the market, ErisX rewards traders with real-time rebates for their contribution to price discovery.
This month ErisX announced the launch of a slate of trading products, including a new user interface and tools, Bounded Futures contracts, and our Get Paid to Trade campaign. This release represents a new foray for us into more B2C oriented products for individual traders. Our new UI brings us in line with direct-to-retail industry peers. ACH funding and onboarding improvements were responses to market feedback. The Algo Machine™ supports Pegged Orders and Order On Fill, which are fairly standard in other asset classes but new for US crypto traders.
Two of ErisX’s new products, The Algo Machine™ and Bounded Futures, are both designed to help investors trade and manage risk more efficiently. They come to market at a time when the price of bitcoin has recently set a new all time high above $27,000. Pegged Orders and Order On Fill are tools that enable members to automate their trading without requiring them to write code. We already offer APIs for individuals and firms that want to fully automate their trading strategies. The Algo Machine™ makes the benefits of automation available more broadly. We launched with Pegged Orders and Order on Fill and will continue to add more algorithmic order types.
Bounded Futures are a brand new, innovative futures contract type. They are cash collateralized and settled contracts with a pre-set upper and lower bound. The collateral requirement for buyers is the difference between the contract trade price and the lower bound, and the collateral requirement for the seller is the difference between the contract trade price and the upper bound.
The contracts enable short positions, and the boundaries cap the maximum loss for the seller and buyer, respectively. Our novel Bounded Futures contract design helps traders manage risk, enables shorting, and may require less collateral than other contracts to establish a position. It was partially a response to the phenomenon of getting REKT traders experience on highly leveraged unregulated markets.
Our contracts were launched on our fully regulated U.S. futures exchange with all the associated protections for investors. No shortcuts or “regulatory arbitrage.” Bounded Futures are available to all Exchange Members in every state, which is true of all the contracts we offer, including ETH futures, which we are the first U.S. exchange to list. These accomplishments are hard and move the entire industry forward a few steps.
Subject to regulatory approval, we look forward to introducing margin eligible contracts next year.
ErisX’s Expectations for 2021
ErisX has met a number of regulatory milestones, including the launch of our futures exchange and clearinghouse. We have onboarded intermediaries, institutions, and direct individual members. We have executed on our product roadmap with a steady cadence of trading and pricing products and published thought leadership and educational content. The recent upgrade to our license enables our clearinghouse to clear derivatives on non-crypto commodities. Despite our strong and consistent execution on licenses, products, infrastructure and customers our volume growth to date demonstrates the challenges in building a regulated, institutionally-focused exchange and clearinghouse. Nevertheless, our spot volumes have begun to pick up substantially and we remain focused on continuing to grow that market. Bounded Futures are off to a good start and our member pipeline and growth is strong. With a new slate of products catering to individuals we look forward to continued market growth and participation.
Our Q1 2021 roadmap is ambitious, we are not taking our foot off the gas. We have a number of exciting futures contracts that we will look to launch pending approval for margin. We plan to roll out USDC trading pairs, integrate third-party trading tools and data, enhance our new trading UI, add more algorithmic order types, and a number of other platform extensions building on our licenses and infrastructure.
In summary, building a business is both exciting and challenging. We continue to play the long game and execute against our plan to build an intermediary-friendly, fully compliant, high performance market center that pushes the envelope of innovation to bring together the best of crypto and traditional markets. Notwithstanding the challenges of 2020, it was a good year for ErisX and our customers and investors. As the benefits and value of crypto continue to become more apparent and mainstream, and more investors join the market in 2021, next year will be even better.
