Interactive Investor

CoinFLEX exchange to launch the world's first physical bitcoin futures

9th January 2019 10:20

Gary McFarlane from interactive investor

Coinfloor and CoinFLEX chief executives talk exclusively to interactive investor's award-winning crypto writer Gary McFarlane about the launch of their bitcoin product that will beat US giants to market.

The UK's oldest crypto exchange, Coinfloor, has spun off its CoinfloorFX futures business to a consortium of investors, which has formed the CoinFLEX crypto-derivatives exchange.

In so doing CoinFLEX  -  Coin Futures and Lending Exchange - has beaten Intercontinental Exchange's (ICE) Bakkt physically  settled bitcoin futures to market and another in the works from the Eris exchange of Chicago. ICE is the owner of the New York Stock Exchange.

However, there is a major difference between the product from Bakkt and CoinFLEX's crypto derivatives: the former will be regulated and the latter is not.

CoinFLEX is unregulated and registered offshore in the Seychelles, with operations based in Hong Kong, but will be fully compliant with know-your-customer and anti-money laundering rules. 

Mark Lamb, CoinFLEX chief executive and previously Coinfloor co-founder, explained in a Bloomberg interview that there is a good reason for taking the offshore route – by being offshore the exchange will be able to target a global audience, unencumbered by the regulatory obstacles some would say is holding back product innovation in the US and elsewhere, although he accepted that approach might put off more risk-averse market participants.

The new exchange has attracted investment from Roger Ver, aka Bitcoin Jesus because of his proselytising role on behalf of crypto. 

Other consortium members include Trading Technologies, Roger Ver, Mike Komaransky, Dragonfly Capital Partners, Global Advisors, B2C2, Amber AI, Grapefruit Trading and Alameda Research.

In exclusive comments to interactive investor, Lamb and Obi Nwosu, chief executive and co-founder of Coinfloor, provided some more detail about the new business as well as the implications for Coinfloor.

We began by asking how the deal might affect ongoing operations at Coinfloor, given the exchange had to lay-off 40 employees in October last year.

Nwosu saw the new venture as a move that would enable Coinfloor to sharpen its offering to investors, instead of having one eye on CoinfloorEX, its initial foray into futures started last May.

"Coinfloor's leadership can now exclusively focus on our core business of being a leading spot cryptocurrency exchange for high-end retail and institutional investors in the UK and Europe."

Contrary to reports back in October that the redundancies last year were brought on by the bear market impacting trading revenues, Nwosu said:

"The majority of staff redundancies were related to our CoinfloorEX futures business which has now been spun off to form CoinFLEX. This deal has allowed us to transition most of the affected staff to the newly created company as a result" he explains.

Coinfloor has a minority stake in the spin-off, but how big is its holding? "Unfortunately, we cannot release this figure. That said, all stakeholders are incredibly happy with the terms of this deal" says Nwosu.

We are asked Lamb if he could provide a little more detail about how custody arrangements for the crypto assets (bitcoin, Ethereum and Bitcoin Cash), given the futures contracts are physically settled?

Traders will be pleased to hear that according to Lamb it will be "100% multisignature cold storage for all crypto and stablecoin assets".

Some observers might be surprised that CoinFLEX has decided to trade the crypto assets against the Tether (USDT) so-called stablecoin (crypto pegged to a fiat currency – in this case the US dollar – or some other asset). 

There has been a flurry of stablecoin launches in the past few months, with US exchange Coinbase, for example, recently listing USDC, a stablecoin from Goldman Sachs-based start-up Circle.

Tether has been at the centre of controversy because of the perceived lack of transparency concerning the extent to which it fully matches issuance 1-to-1 with dollars and its uncertain relationship with banking services.

"We looked at every stablecoin and none were nearly as liquid as Tether. Tether has 95%-plus of the stablecoin volume and liquidity and with Bloomberg recently verifying it’s holdings over four monthly periods, it was a no brainer," says Lamb. "Tether is more volatile than USDC however, and so we created a Tether/USDC futures market for anyone looking to hedge Tether risk."

In terms of the risks to the exchange if the Tether peg fails or confidence is impaired in some way, Lamb added: "There are definitely fears people have about it, which is one of the reasons we have created a Tether future that people can use to short it."

Lamb expects that trading on the exchange will mirror the behaviour in other derivatives markets.

"We are expecting most clients not to hold to expiry. The important thing here is the threat of physical delivery which keeps the futures contract in line [with the underlying asset price] and ensures that for anyone who wishes to take or make delivery, they are able to do so with ease."

Tom Lee, head of research at Wall Street firm FundStrat Global Advisors, postulated that the launch of bitcoin futures on the CBOE and CME in December 2017 pressured prices lower, although he never explicitly laid out what the transmission mechanism was to support his thesis. 

We asked Lamb for his thoughts on this given the physical contracts by definition closer relationship with the crypto market. He did not have a view on the Tom Lee thesis but reiterated the fact that "the threat of physical delivery at expiry will keep the contract in line with the underlying".

Clem Chambers, chief executive of global investor network ADVFN (LSE:AFN) and AIM-listed Online Blockchain, welcomed the launch of the new product.

"All innovation in crypto is good because we are still at day one for the whole industry. Innovation will create the 'killer applications' that will take Blockchain to the next level."

Regarding the impact on spot prices, he thought it depended on the volume of trade but overall the impact would be neutral.

"The effect on the bitcoin price will be down purely to how successful the exchange is and how many new coins are needed to fill the new demand for BTC's circulation. If less coins are needed it will suppress the price, if more coins are needed it will elevate the price. 

He continued:

"Less coins might come from creating exposure to BTC without the coins needed to be mined, the greater demand from an increase in trading interest. On balance, I believe it will not create a material change in price for bitcoin."

CoinFLEX's major competition at launch, at least until the Bakkt product comes on-stream, will be from the likes of BitMEX, also based in Hong Kong, which provides leveraged trading of up to 100x on a variety of crypto derivatives.

For its part, CoinFLEX is offering a less racy 20x margin to its clients and will open for business in February, initially focusing on the Asian market.

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