Wall Street banks hit pause button on Bitcoin

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Bitcoin is clearly in a bubble: David Nelson

Belpointe Chief Strategist David Nelson on the outlook for bitcoin.

As investors rush into bitcoin, some big Wall Street banks are hitting the brakes.

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Bank of America (BAC) Merrill Lynch and Citigroup Inc. (C) are telling customers that they won't offer them access to the first bitcoin futures market when it goes live on Sunday, people familiar with the matter said .

Morgan Stanley (MS) and Société Générale SA are still evaluating their approach to bitcoin futures, people familiar with the situation said Thursday. ABN Amro Group will be handling trades "for a small selected group of professional clients," a spokeswoman for the Dutch bank said in an e-mail.

Banks play a key role in facilitating futures trades for hedge funds and other big trading firms. If they don't provide access to the new market, some of their customers might be unable to place bets on bitcoin futures.

The banks may change their minds and start offering the service. Still, their hesitation could put a damper on the hotly anticipated launch of bitcoin futures, which proponents see as a huge step forward in the evolution of the digital currency.

Cboe Global Markets Inc. (CBOE), a Chicago-based exchange operator, plans to open the first U.S. bitcoin futures market this weekend, less than 10 days after regulators gave it the greenlight -- a tight time-frame for many firms to get comfortable with the new product, market participants say. Cboe's larger crosstown rival CME Group Inc. (CME) is set to launch a competing bitcoin futures market on Dec. 18.

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A Cboe spokeswoman said Sunday's launch would go ahead as planned. The exchange declined to release a list of banks prepared to handle trading in its bitcoin futures, citing confidentiality.

Bitcoin smashed through the $16,000 mark on Thursday, only a day after passing $12,000, according to CoinDesk. It was trading at $968.23 at the start of the year.

The rapid increase has made it difficult for more buttoned-up Wall Street firms to ignore the digital currency, despite concerns over its uncertain legal status and links with illicit activity. Now, banks are trying to catch up with surging investor interest, while at the same time managing the risks associated with bitcoin's notorious volatility.

To access the futures market, a trader needs to open an account with a brokerage. The broker can be liable for losses if that trader's bets go wrong.

Many futures brokerages are grappling with how to handle the risks of bitcoin futures due to the volatility of the digital currency, brokers said.

Banks in their role as futures brokers act as a buffer to counterparties, so they are on the hook should their clients suffer losses they can't pay. In assessing whether to support bitcoin futures, brokers need to evaluate their relationship with clients and figure out whether to charge higher amounts to backstop bitcoin futures trades -- an extraordinarily difficult task given bitcoin's volatility.

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Exchanges, which set the minimum-margin requirement that traders must post in cash to enter a futures bet, have also wrestled with that task. Cboe said Monday that its clearing house had hiked the minimum to 44% from 33%, due to the "bitcoin price volatility over the past few days." The minimum on CME's contracts is currently 35%. A CME spokeswoman said the exchange could adjust that level in response to changes in bitcoin's volatility.

The hesitation of big brokerage firms also casts doubt on whether Wall Street is ready for cryptocurrencies.

Typhon Capital Management, a $100 million hedge-fund firm, plans to begin trading Cboe's bitcoin futures on Sunday in one of its funds. Chief Executive James Koutoulas said that of the 12 different brokers his fund has relationships with, so far "only three have given us a go-ahead" to trade bitcoin futures.

Compared with smaller futures brokers, banks' clients tend to include larger hedge funds and institutional investors. That means such players could have trouble accessing Cboe's bitcoin futures, reducing trading volumes in Cboe's new market, at least initially, said Craig Pirrong, a finance professor at the University of Houston.

"That undermines the advantage of going first," Mr. Pirrong said.

The reluctance of some banks to jump in on Sunday has created a window for some smaller brokers to offer access to Cboe's bitcoin futures, such as Los Angeles-based Wedbush Securities Inc. and Chicago-based Phillip Capital Inc.

It has "opened up opportunity to talk to customers that we've been courting for several months," said Bob Fitzsimmons, managing director and head of Wedbush's futures arm, saying that the firm is being "prudent" in choosing which clients can access the futures.

Interactive Brokers Group Inc. will offer customers access to Cboe's bitcoin futures, but only for so-called "long" traders betting on a bitcoin price increase, Chief Executive Thomas Peterffy said in an email. That would help protect Interactive Brokers in case bitcoin futures skyrocket, causing potentially unlimited losses among "short" traders betting on a price fall.

"We are still concerned that customers will default and some smaller brokers will go bankrupt which may destabilize the clearing houses," added Mr. Peterffy, who has sharply criticized the exchanges' approach to launching bitcoin futures.

The largest U.S. futures brokers are all big multinational banks. Goldman Sachs Group Inc. (GS) is the largest, followed by JPMorgan Chase & Co. (JPM), according to Commodity Futures Trading Commission data. Bank of America, Morgan Stanley and Citigroup are also some of the largest. JPMorgan declined to comment on their plans, while Goldman did not immediately have a comment.

FIA, a trade association that represents many big futures brokerages, voiced concerns of its members about the risks of bitcoin futures in a letter released Thursday.

The group told the market regulator CFTC that the agency "did not allow for proper public transparency and input" in the process of examining Cboe and CME's proposals to launch bitcoin futures.

"Given the lack of historical data on these products, it is further concerning to clearing members that they will bear the brunt of the risk associated with them," the letter said.

A CFTC spokeswoman acknowledged the FIA's letter. "The CFTC agrees that the bitcoin is a commodity unlike any the Commission has dealt with in the past," she said.

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