Traditionally, our company has purposely been working quietly on the sidelines. Now, with official United States regulatory approval for our exchange and clearing house licenses, this is going to change dramatically. I wanted to write a blog post formally introducing our company.
LedgerX’s Raison D’etre
When we started LedgerX, we were a group of people fascinated by the technical breakthrough that gave rise to distributed currencies and were optimistic about the innovation that it would finally bring to financial services.
But we aren’t fiat anarchists — we believe traditional fiat currencies (USD, EUR, etc.) will coexist with digital currencies (BTC, ETH, etc.) now and into the future. So the natural importance of an “on ramp / off ramp” to transfer value between these two worlds was obvious to us.
Take this example: you’re an American and want to enjoy the splendor of Paris on your next vacation. That’s fantastic — but first you are going to need to convert your dollars to euros. This scenario is not different at all in the context of cryptocurrencies. Do you want to participate in the next big ICO? That’s great, but the first step is to transfer your dollars to ether. Need to pay your mortgage in dollars, but you hold the majority of your assets in Bitcoin? No problem, you simply convert your BTC to USD. Cryptocurrency conversions like this will, over time, be no different from the exchanges done every day between dollars and euros.
Crucially, we believe derivatives on cryptocurrencies will be needed in the long term for people and institutions to manage the volatility around these conversions. This is why we started LedgerX, and while this central thesis is simple, the implementation is incredibly complex — a multi year journey that has finally come to fruition.
Our Battle Plan
For historical and cultural reasons, we often think internally in military terms and analogies, so forgive me if some of the titles below are correspondingly aggressive. (We’re proud to have a Marine veteran on our executive team, and are always looking to hire ex-military to our ranks. LedgerX is a demanding place to work and mental toughness is key).
To give our militaristic master plan away, here are the five key pillars that we formulated and are determined, and on track, to execute:
Globally and domestically, digital currency regulation is a messy continuum that spans from no regulation, to gray area / “risk tolerant” regulation, to state by state bespoke regulation, to a nightmare hodgepodge of money services business and state-by-state money transmitter licenses.
We are not a money services business. We are a United States exchange and clearing house, which allows us to have a single federal regulator that is exceptionally competent and experienced at overseeing markets like ours.
The earliest bet LedgerX made at its founding was that a federal regulator in the United States would provide a critical foundation to allow real institutional involvement in cryptocurrencies. To us, well before it was officially announced, that regulator was obvious — the United States Commodity Futures Trading Commission. (As a side note, essentially only three people in Silicon Valley believed us at the time, but the past two years have vindicated our thesis).
The CFTC is the world’s premier federal regulator for the trading of assets as diverse as wheat, gold, oil, and currency derivatives, among many others. They are the most experienced and natural regulator for a new asset class like Bitcoin and other digital currencies.
Our recently-granted licenses give LedgerX an enormous regulatory advantage for serving our institutional customers. These licenses offer a degree of comfort so far unseen in the digital currency space. If you are a hedge fund, commodity trading advisor, or any large asset manager that trades currency options, gold futures, or oil swaps, then LedgerX will look no different from the platforms you already use. LedgerX is a platform that has the exact same high standard of regulatory oversight and surveillance requirements. We hope that our offering opens the market to a new set of participants that have so far sat on the sidelines, adding many billions of dollars of market capitalization to all cryptocurrencies.
Banking has always been, and continues to be, one of the most difficult challenges in the Bitcoin space. LedgerX, with its regulatory approval, is proud to have extremely high-quality relationships with several top tier banks. The banks we work with have combined assets of nearly 500 billion dollars (yes, with a “b”), making us very likely the top bitcoin company in the world with this level of engagement with the banking system.
Federal oversight by the CFTC, as well as our institutional focus, have made these relationships possible and we are proud to work with these partners. Our arrangements with these banks are also a critical advantage for our clients. Many of the largest asset managers in the world store their assets in the same banks we use, which makes transferring dollars to our clearing account a much simpler, faster, and more cost effective process.
Unmatched Integration Capability
Vertical integration is at the heart of our philosophy. We don’t outsource our exchange, clearing, or risk software. Everything is built in-house (after all, we are an engineering first company), giving us the flexibility to move quickly and adapt to the fast-moving crypto world.
We are not an exchange. Exchanges are easy. Guaranteeing derivatives trades is hard, and that is what a central clearing house does (getting the license for this is hard, too). We are a combined exchange and clearing house, which makes a big difference in integration ease, trade safety, and cost. The on-boarding process is significantly easier than having to deal with multiple integrations with SEFs/DCMs, FCMs, or DCOs. You only have to deal with LedgerX.
We also do not have to do costly integrations with legacy clearing houses. Many exchanges are subject to the whims of other DCOs’ potential willingness, unwillingness, or competence to clear an innovative new product. We’re subject to none of these concerns, which serves our fast-moving clients well — also, we do not have to pay third-party clearing fees. This allows us to pass on these savings directly to our customers.
With both our announced and unannounced financings, along with the incredible efficiencies gained from being built from the ground up as an engineering first clearing house (we have often been described as a “robo clearing house”), we are in a position to operate for many, many years. This allows comfort to both our regulators and customers as we move to list yearly and multi-year transactions, and our ability to settle and guarantee these obligations.
Assured Access to Global
If there is one thing that is often underappreciated in the US, it’s the fact that digital currencies are a global phenomenon. Here too, LedgerX has an unprecedented advantage in servicing this need. With the recent CFTC agreement with international regulators for an “equivalence” arrangement, or roughly, a fast track way for existing federally regulated institutions to acquire equivalent licenses in other countries — well, this path is certainly on our roadmap.
Oh, and One More Thing…
People think of us as an options exchange, but our license is called a Swap Execution Facility for a reason. So I’m pleased to also formally announce a product we’ve had in the works for the last two years — LedgerX Day Ahead Swaps. Think of this as a short term deliverable forward — if you purchase it today, you will get the bitcoin tomorrow. If you have bitcoin and sell it today, you’ll get the dollars tomorrow. The contract specification is here.
There are a lot of exchanges that talk about being an institutional exchange. This is curious to me as they resemble nothing that I was used to as a former institutional trader at Goldman Sachs.
I’ll give an example. Perhaps the most important equities instrument used to hedge and speculate on is the S&P 500 futures contract (SPUs or e-minis, for those familiar). This is one of the most liquid and institutional instruments in the world, and it has a minimum tick size of 25 cents (not 1 cent, for good reason) and a minimum contract size that is worth around $120,000 (also for good reason). There are structurally important considerations for this, and to LedgerX, that is what institutional trading really looks like.
LedgerX’s Day Ahead Swap will not be quite as large as S&P500 minis, but the minimum contract size is worth one BTC, or approximately $2,700 at today’s prices. The minimum tick size will also be 25 cents, which will ensure concentration of liquidity for actual institutional players. There will be no risk of an institution having to miserably waddle through CLOBs littered with inconsequential limit orders that amount to all of $4 worth of BTC. You can get real size, and certainty of execution, with our day ahead swaps.
You might imagine that there are more products down the line that we’ve already designed which we will list, and that is absolutely correct — these derivatives will take advantage of aspects of Bitcoin’s unique risks and our flexibility to list swaps. We’ll be announcing them on a regular cadence for the rest of 2017.
The End of the Beginning
LedgerX offers our customers a one-stop shop for tools to buy and sell spot bitcoin, derivatives, and all manner of specialized cryptocurrency swaps. This combined offering makes it absolutely seamless for our customers to gain directional exposure, volatility tools, and hedging abilities, all under US federal supervision.
I hope this was useful in describing our platform, one on which that the team has worked incredibly hard and is extremely proud to announce today. While we have the required licenses, we are setting the official launch date to be in September (since we’re in the dog days of summer, most of our customers are rightfully enjoying a vacation) to be held at our brand new offices in NYC, the world’s financial capital.
If you are a qualified participant interested in joining, please find more information about trading on LedgerX here. Also, we’re hiring like crazy so if any of this seems interesting to you, please contact us.