Hard Forks have been increasingly common for BTC and other cryptocurrencies and have traditionally posed challenges for any wallet provider, spot exchange, or general custody service. In the past, we have seen wallets choose to support certain forks but not others, a calculus that is necessitated by the fact that they control the ultimate private key, and complicated by the fact that not every fork is easily supported in terms of withdrawals.
As a clearing house and derivatives exchange, LedgerX faces those issues and more. We face very similar issues to a spot exchange. If a fork happens and the other digital currency has a viable spot market with a quickly appreciating price, we cannot guarantee that we can separately transmit that new coin to a customer in a timeframe that is acceptable to the customer. Additionally, we do not have the resources to build out the required security and engineering infrastructure to support transmission on every hard fork that comes out in the future. Incredible amounts of time, investment and security review have been devoted to ensuring safe transmission of classic BTC, and we would have to hold ourselves to a similar standard to any other digital currency — this is simply not resource feasible for us or any other exchange.
On top of these considerations, we also happen to list derivatives with expirations of varying length into the future. This adds an additional complication beyond the custody issue, and has to do with fairness for the derivatives holders. The easiest example to describe is a long Put holder. This institution has paid a USD premium for the option to put the asset, say BTC, to the short Put writer in the future in return for the strike price.
If LedgerX blindly supported all hard forks that occur between the trade time and expiration, this would wreak considerable havoc and uncertainty in the marketplace. The reason is that a blanket policy supporting all hard forks would mean the short Put holder could demand the original BTC as well as all coins that were forked during the life of the option. The put holder would then have to potentially scramble to find not just BTC, but all of the other coins that were spun off — something that might be infeasible. For example, not all spot exchanges will support the forked coins, due to lack of interest, volume, or security concerns of the new protocol. We do not want to put our customers in a position where a Put holder that is clearly in the money cannot deliver a scarce coin that might only be traded at an unregulated exchange in some unknown part of the world.
This brings us to LedgerX’s current policy towards hard forks. Our management and risk committees will evaluate each hard fork on a case by case basis. We will then publish public notices to our members as to our plan for that hard fork as soon as prudently possible. The considerations will include, but not be limited to, the following:
1) Indicated marketplace support. Are there robust, stable spot exchanges planning to support a liquid and fair market for the new coin? Will these exchanges be under a regulatory regime that LedgerX’s members will be comfortable participating in? This would give us greater comfort that exchange members will have viable options to obtain and post the deliverable, a key function that we need to support as a physically settled clearing house.
2) Feasibility and security. As with our BTC operations, our engineering team would need to evaluate the stability and security of the new coin. If it were designed with little peer review and questionable security standards, we would not want to support a coin underpinning derivatives that could be stolen via a software vulnerability, an outcome that has happened in the past to other digital currencies. Additionally, we would have to scope the engineering development resources to safely store and transmit the new coins for our clearing members. This is something we are happy to do if we have sufficient time and the economics of the coin are estimated to be robust.
3) Regulatory Comfort. We will work very carefully with our regulators, the Commodity Futures Trading Commission, to describe the technical aspects and capabilities of the newly forked coin. If, for some reason, there is a regulatory gray zone (for example, the coin potentially resembling a security), or other aspects of the new coin that might invite regulatory concerns or legal risk, we will not support that fork even if 1) and 2) above are satisfied.
We appreciate your support, understanding, and patience as the ecosystem navigates these novel issues. Our policy is designed to be as transparent and fair to all market participants as possible.