Cboe’s crypto approach appeals to regulators unlike Binance, Coinbase

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Chicago-based Cboe aggressively dabbled in digital assets just over a year ago with its acquisition of ErisX, a crypto trading platform rebranded as Cboe Digital. A few months later, Cboe issued a non-cash write-off of $460 million on the acquired business, after the financial meltdown of leading crypto exchange FTX raised questions about the future of crypto.

But CEO Ed Tilly hasn’t been shy about pushing ahead, betting that interest in crypto will persist.

Crypto stocks have made a partial comeback since then, but regulatory dangers surround companies that haven’t gotten the blessing of the SEC or the Commodity Futures Trading Commission. SEC Chairman Gary Gensler, with the actions against Binance and Coinbase, seeks to force them to register with his agency. Both companies have pledged to fight the actions.

Meanwhile, Cboe is working through existing channels to slowly grow its fledgling digital business. This has earned the company plaudits from regulators, who are seeking to impose rules on what they have called the “Wild West” of buying and selling digital tokens.

“Too often in recent years, crypto firms have sought to take a business model or market structure that exists in an unregulated environment and transfer it into the regulated environment,” CFTC Commissioner Christy wrote. Goldsmith Romero as the agency approved Cboe margin futures. “The CFTC has no window into the risks associated with models or structures in an unregulated environment. Cboe has not done this, instead operating within the parameters of the traditional futures market structure and regulatory framework.

The green light from regulators also gives Cboe a potential competitive advantage, allowing it to forge ahead with crypto trading while its rivals operate under a regulatory cloud. Cboe offers fully collateralized Bitcoin and Ether futures contracts. Now, investors will be allowed to buy the futures contracts on margin, which means they will only have to pay a portion of the value of the investments. Additionally, investors can spot trade five different digital coins on Cboe’s platform.

Cboe will then turn its attention to crypto options as it determines what to seek regulatory approval for, a spokeswoman said. The options, she emailed, are “still ambitious at this point. We are now still focused on launching the margin futures contracts for which the application has just been approved, onboarding customers and creating liquidity in these products.

Options make up the bulk of trading on Cboe, particularly its VIX Volatility Index Option and Standard & Poor’s 500 Index Option.

Trading activity at Cboe Digital has increased tenfold since Cboe acquired ErisX in May 2022, she said. Volume has averaged $50-70 million per day this year. In February, volumes hit $350 million on some days, she said.

“We can read the headlines (with crypto and regulatory battles), but it really wasn’t the company we were chasing anyway,” Tilly said June 8 at an investor conference. “That’s, I think, what we’re all looking for in the United States. . . some clarity on the SEC and the CFTC. “We know our partners at Cboe Digital don’t want to break the rules, but they want to know what the rules are. We therefore believe that any opportunity for clarity is (an) opportunity in general to develop the space and to develop it in a very regulated and reliable way.

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