Once upon a time, this is how they would trade futures (via Wikicommons)

Updated at 10:17 p.m. on Dec. 9, 2019: On August 1, the Commodity Futures Trading Commission pulled the rug out from under LegderX’s claim that it was licensed to offer physically settled bitcoin options. On Dec. 9LedgerX CEO Paul Chou and his wife,

Updated at 3:43 p.m. on June 25 to add comments from LedgerX CEO Paul Chou.

The first American cryptocurrency futures exchange open to individual traders has finally been given the O.K. from regulators.

The U.S. Commodity Futures Trading Commission (CFTC) announced on June 25 that it has approved LedgerX’s application as a designated contract market (DCM). A DCM may “list for trading futures or option contracts based on all types of commodities and that may allow access to their facilities by all types of traders, including retail customers,” according to the CFTC.

What this means is that unlike CME Group’s futures contracts that are settled in fiat currency, LedgerX can trade physically settled contracts in which the buyer receives the actual cryptocurrency. Initially it will offer bitcoin (BTC) futures, with other cryptocurrencies planned for later this year.

“Obtaining CFTC approval to offer physically settled bitcoin futures, options, and swaps to retail investors is the culmination of years of hard work, but it is only the beginning,” LedgerX CEO Paul Chou told Modern Consensus in an email. “In the coming months we plan to offer more exotic derivatives, lower minimum investment thresholds, and bring other innovations to the crypto markets.”

In a physically settled bitcoin futures contract, one party agrees to deliver a set amount of the cryptocurrency at current prices to another person in a set amount of time—for example 30 days. The actual bitcoin doesn’t change hands at the time the futures contract is sold; only at the settlement date does it go from the seller to the buyer. But if the price goes up after the trade but before delivery is made, the seller may have to pay more for the bitcoin that must be delivered than the agreed-upon price, assuming the seller sold without owning the bitcoin first—and the buyer makes a profit. All futures contracts have a winner and a loser.

LedgerX has already listed futures contracts but only for institutional clients, generally defined as having assets of at least $10 million. The company acts as its own clearinghouse, taking custody of cryptocurrency used in futures itself rather than using an intermediary, as is customary in the traditional commodity futures market.

“Retail investors drove the previous crypto bull run in 2017, and we believe they are where the most future potential value lies,” Chou said. “Giving them access to the same liquidity and price discovery as institutional investors already on our platform will help to further enable them to make smarter investing decisions, and should ultimately help grow the markets in a long-term, sustainable way.”

While U.S. customers can sign up with a current government ID, Chou warned in a blog post that the on-boarding process would be slow in order to allow LedgerX to test and monitor its trading platform as it ramps up. In addition, it has a long waiting list.

A long road

Many companies are interested in this market. The New York Stock Exchange’s (NYSE) owner Intercontinental Exchange (ICE) announced plans to offer physically settled bitcoin futures this year. ICE’s Bakkt platform has a DCM license application pending. Bakkt is also offers bitcoin retail payment technology.

NASDAQ has also expressed its intention to enter this market. So has ErisX, which has a DCM application pending. In April, it entered the cryptocurrency spot trading market.

In March, Cboe Global Markets pulled out of the institutional bitcoin futures market due to lack of interest, while the more successful CME stayed in the game.

While the CFTC has been criticized as slow in issuing these licenses, outgoing Chairman Christopher Giancarlo has been seen as generally favorable to the cryptocurrency industry, earning the moniker “Crypto-Dad.”

Chou, a former Goldman Sachs trader, praised the CFTC’s deliberate process in his blog post, saying, “[t]he authorities have been very thoughtful and careful in this regard, way beyond any other international government regulatory agency that we see. The [CFTC] has taken extraordinary leadership in this uncharted world of cryptocurrencies. They have recognized that if crypto is a commodity, then we had better make sure that we get it right, and make sure customers are safe.”

LedgerX and its parent company Ledger Holdings have several directors who were high up in the CFTC, starting with former CFTC commissioner Mark Wetjen, currently managing director and head of global policy at The Depository Trust & Clearing Corporation (DTCC). Another director is Ananda Radhakrishna, vice president of the American Bankers Association’s Center for Bank Derivatives Policy, is a former director of the CFTC’s Division of Clearing and Risk.