“[Bitcoin’s] worse than tulip bulbs. It won’t end well. Someone is going to get killed.” Chase CEO Jamie Dimon
“Bitcoin is an index for laundering.” Blackrock CEO Larry Fink
Despite its (albeit heavy weight) detractors, bitcoin and its cryptocurrency cousins have made an impressive foray into the business world. This year alone, block-chain based initial coin offerings, or ICOs, could raise close to $3 billion, according to a report by Greenberg Taurig LLP. The massive interest has prompted both the CME Group and CBOE to venture into contract launch plans on bitcoin, which gives the asset class a bit more credence than it has in the sometimes murky world it currently exists.
There has been plenty of fraud surrounding cryptocurrencies, but then, gold and forex bucket shops were prevalent in the early days of those commodities as well. That withstanding, the IRS has allowed self-directed IRAs to invest in certain physical assets and property if they’re held by an approved custodian, and as of 2014, it noted for federal tax purposes that virtual currency would be treated as property. However, as futures contracts, it is expected that these products would be treated tax wise as a derivative contract.
The information on bitcoin and its cousins is a bit overwhelming right now, so here is a short list on bitcoin developments and regulatory updates to help you when looking into or dealing in bitcoin and other cryptocurrencies.
* The Financial Industry Regulatory Authority (FINRA) has yet to provide any guidance on its member firms’ participation in ICOs.
*In October 2017, the CFTC released a primer on virtual currencies that reiterates the CFTC’s 2015 position that virtual currencies are commodities, and therefore, the CFTC has jurisdiction when a virtual currency is used in a derivatives contract or in the case of fraud or manipulation in a transaction involving interstate commerce.
*In July 2017 the CFTC registered cryptocurrency trading platform LedgerX as the first federally regulated cryptocurrency derivatives exchange and clearinghouse. LedgerX is an institutional platform on which bitcoin is cash-settled. Reportedly, in its first week trading bitcoin on LedgerX, there were 176 swaps and options contracts traded, with notional values of more than $1 million.
*The CME Group bitcoin contract is to launch sometime in the next month, depending on regulatory approval. For the past year the CME has worked with Crypto Facilities Ltd. to calculate and publish the Bitcoin Reference Rate (BRR), on which the new cash-settled contract will be settled. The BRR is an aggregate of the trade flow of major bitcoin spot exchanges during a calculation window into the U.S. dollar price of one bitcoin as of 4 pm London time. The BRR is designed around the IOSCO Principles for Financial Benchmarks.
The CME also publishes the CME CF Bitcoin Real Time Index (BRTI), which aggregates global dollar price of bitcoin. It can be used for marking portfolios or executing intra-day bitcoin transactions, according the CME.
Key specs on the contract thus far include: Contract unit amounts to 5 bitcoins, as defined by the CME CF BRR. The minimum price fluctuation will be $5 per bitcoin or $25 per contract. The contract is cash settled. Trading will be between 5:00 PM Sunday and 4:00 PM CT the next day (note it is down one hour every day) from Sunday months in the March quarterly cycle (Mar, Jun, Sep, Dec) plus the nearest 2 months that are not in the cycle. Spot position limits are set at 1,000 contracts. Price limits and special price fluctuation limits will be in place.
*On the other side of Jackson Avenue, the CBOE Global Markets partnered with Gemini, a digital assets exchange – started by the Winklevoss brothers – to launch its own futures contract by early 2018. There isn’t much information on this product at this point.
*In Argentina, the Mercado de Termino de Rosario or Rofex, has put together “preliminary drafts [that] include offering custody services for the digital asset and the possibility for clients to use bitcoin as collateral in futures trading,” according to Bloomberg.
*Financial regulators have banned the sale of ICOs in China and South Korea, with China also banning cryptocurrency exchanges (though not in Hong Kong and some other venues it controls).
*Japan has recently recognized bitcoin as a legal currency, boosting demand for the virtual coins
If you are interested in starting a crytocurrency fund or are in need of a year end audit of your fund, please contact Mike at 630-351-8942 or email Mike@cogcpa.com.