South Korean officials have reportedly banned local finance firms from handling bitcoin futures, one of the hottest new financial products to launch in years.
Business Korea reported that the Financial Services Commission of Korea issued a directive banning securities firms from taking part in bitcoin futures transactions, citing sources.
South Korea has taken a tough stance on digital currencies, banning initial coin offerings (ICOs) earlier this year. ICOs involve startups issuing their own digital currencies to raise funds.
Bitcoin is hugely popular in South Korea. Mati Greenspan, an analyst with trading platform eToro, said in an email last week: “Recent estimates state that 21% of all global BTC volume are done in Korean Won.”
Greenspan said proximity to North Korea might help explain the higher risk appetite of South Koreans. He added: “After recently going through a political meltdown and ousting the former President Park Geun-Hye, and after watching the CEO of the Samsung go to prison on corruption charges, their faith in the system is currently at a justifiable all-time low.”
Bitcoin was originally created as an anti-establishment currency meant to be above the control of governments.
Bitcoin futures start with a bang
The ban on bitcoin futures was made ahead of the launch of the new products on Sunday evening. Chicago-based exchange operator Cboe began offering bitcoin future contracts on Sunday and was met with huge demand. Cboe’s website briefly crashed and the price of both bitcoin and futures contracts leapt higher.
Hussein Sayed, chief market strategist at FXTM, said in an email: “The initial reaction was beyond expectations with the futures contract climbing more than 20% and triggering two trading halts. CBOE’s website experienced unprecedented traffic which may well have sent a new benchmark; the frenetic activity led to delays and outages.”
Cboe’s product is the first that gives institutional investors such as hedge funds and asset managers exposure to bitcoin. The market allows them to speculate on the future price of bitcoin without having to directly buy and hold the digital currency. This skirts any regulatory and custodian issues that might be presented by bitcoin.
Institutional investors have grown increasingly interested in bitcoin as the cryptocurrency’s price has continued to rise. Bitcoin is up over 1,000% against the dollar so far this year and rose as much as 40% in the last week alone.
Sayed said: “So far, it seems professional investors aren’t willing to bet against the bitcoin, despite the many warnings of a bubble that will burst soon. Many traders aren’t even interested in the price direction, but the listing of the futures contract on CBOE and later next week on the CME will provide them an arbitrage trading opportunity due to the vast pricing differences.”
South Korea’s regulators aren’t the only people worried about bitcoin futures. The digital currency is subject to huge amounts of volatility — swings of 20% on the day are not unusual — and some market participants fear futures contracts could add a large degree of unquantified risk to the financial system.
The Futures Industry Association wrote to the Commodity Futures Trading Commission (CFTC) last week to complain that there had not been “proper public transparency and input” from industry over the products. Banks such as JPMorgan and Citi are also reportedly not clearing bitcoin futures for clients, at least for now.
Sayed said: “The arbitrage trading will lead to improved price efficiency and probably less volatility. After volatility settles down, the focus will return to the price direction.”