Cboe crypto approach pleases regulators, unlike Binance, Coinbase

Chicago-based Cboe moved aggressively into digital assets a little over a year ago with its acquisition of ErisX, a crypto trading platform rebranded as Cboe Digital. Just a few months later, Cboe took a non-cash writeoff of $460 million on the acquired business, after the financial meltdown of major crypto exchange FTX raised questions about crypto’s future.

But CEO Ed Tilly didn’t hesitate to press ahead, betting that interest in crypto would persist.

Crypto values have made a partial comeback since then, but regulatory dangers surround firms that haven’t won 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 firms have vowed to fight the actions.

Meanwhile, Cboe goes through existing channels to slowly grow its nascent digital business. That’s won the company plaudits from regulators, who seek to impose rules on what they’ve termed 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 port it over to the regulated environment,” CFTC Commissioner Christy Goldsmith Romero wrote as the agency approved Cboe’s margined futures. “The CFTC does not have a window into the risks associated with models or structures in an unregulated environment. Cboe has not done that, 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 move forward with crypto trading while rivals operate under a regulatory cloud. Cboe offers fully collateralized bitcoin and Ether futures. Now, investors will be allowed to purchase the futures on margin, meaning they have to front cash for just a portion of the value of the investments. Additionally, investors can make spot trades of five different digital coins on Cboe’s platform.

Cboe next will turn its attention to crypto options as it determines what to seek regulatory approval for, a spokeswoman said. Options, she emailed, are “still aspirational at this stage. Our focus now is still on launching the margined futures for which the application just got approved, and getting customers onboard, and building liquidity in these products.”

Options make up most of the trading on Cboe, particularly its VIX volatility index option and its 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 million to $70 million a day this year. In February, volumes got to as high as $350 million on some days, she said.

“We can read the headlines (with crypto and regulatory battles), but that was really not the business that we were chasing anyway,” Tilly said June 8 at an investor conference. “It is, I think, what we’re all looking for in the U.S. . . . some clarity out of the SEC and CFTC. “We know that our partners in Cboe Digital don’t want to break the rules, but they want to know what the rules are. So any opportunity for clarity, we think, is (an) opportunity in general to grow the space and to grow it in a very regulated and trusted way.”