CBA Record January 2018

the cryptocurrency spot market, investors can buy and sell convertible cryptocurren- cies in exchange for U.S. Dollars, other government-backed currencies, or other cryptocurrencies. Some of the largest spot market exchanges include Coinbase, Bitfinex, Itbit, Kraken, and Gemini. Investors can buy into a range of cryptocurrencies by providing the exchange with a credit or debit card number. These exchanges can be accessed via the Internet. Most exchanges have smartphone applications, where users can track their investments in real time. Investors should know that spot market cryptocurrency exchanges are not always regulated (unlike, for example, the NYSE or CME, which are heavily regulated by the SEC and CFTC, respectively). Moreover, many of these exchanges operate overseas, which raises challenges to jurisdiction and the ability to recoup fraud-related losses. Even the most reputable exchanges have had major issues. For example, Coinbase came under fire on December 19, 2017 for allegations that its employees had commit- ted insider trading in anticipation of Coin- base publicly announcing that it was listing “Bitcoin Cash” (an alternative to Bitcoin itself ). As alleged, insiders anticipated that this announcement would drive up the price of Bitcoin Cash, and they may have gobbled up units of this cryptocurrency on other exchanges in the hours and minutes leading up to the announcement. Cyber threats also pose a serious risk. In 2014, the Japanese exchange, Mt. Gox, lost 850,000 Bitcoins (then worth around $450 million) in a cyber-attack, leading it to shut down and declare bankruptcy. At the time, Mt. Gox was the largest Bitcoin exchange. Exchanges have also been mired in outages, which have triggered disputes with customers as to the prices at which cryptocurrencies should have been liqui- dated. These incidents beg the question of whether the cryptocurrency spot exchanges have the resources and commitment to

regarded futures and options exchanges (and others) offering futures contracts drew further attention to Bitcoin. Spot market prices soared in the days leading up to the opening of futures trading. At the same, time, these venues are seen as a means of “shorting” Bitcoin (i.e., betting it will decline in value). Some welcome this as a way of stabilizing price movements and reducing the risk of bubbles. Unlike many futures products, which require the actual delivery of the underly- ing commodity at the end of the contract term, Bitcoin futures are “cash settled.” They do not require the actual delivery of Bitcoin, but instead settle on the basis of a reference point. If prices go up, the

buyer will receive the difference between the contract price and the current bench- mark price on the day the futures contract expires. Conversely, if prices go down, the seller will receive the difference between the contract price and the current benchmark price on the expiration date. Those who had purchased (sold) can sell (buy) con- tracts before expiration to lock in gains or cut losses. The CBOE’s contract uses the price of Bitcoin on the Gemini exchange. The CME uses the “Bitcoin Reference Rate,” which combines price information from exchanges such as Bitstamp, GDAX, itBit and Kraken.

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In mid-December 2017, the CBOE and the CME commenced trading in compet- ing futures products. News of these well-

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