The CEOs of the two exchanges have sharply differing perspectives on the future of crypto. Correspondingly, they are positioning their companies far differently in the wake of the FTX debacle.
CME in 2017 listed a bitcoin futures contract and followed later with an ether futures contract. But the exchange hasn’t expanded its offerings since then, and CEO Terry Duffy maintains a wait-and-see posture on even the two existing products as 2023 approaches.
Cboe took a similar toe-in-the-water approach five years ago but plunged into the industry late last year with a deal to acquire ErisX, an exchange for crypto coins and derivatives, after helping found the firm several years back.
The buyout closed in May, just as crypto values were plummeting, which prompted Cboe to write down more than $450 million of the value of the platform. Cboe never disclosed what it paid for ErisX, but the write-off clearly represented a substantial chunk of the value. Nonetheless, Cboe believes ErisX—now redubbed Cboe Digital—will generate substantial future growth.
What is the opportunity for Chicago’s long-standing commodities exchanges in what has been dubbed the “crypto winter”? “It really comes down to different views on the long-term potential of crypto itself,” says Michael Miller, an analyst with Morningstar in Chicago.
Crain’s spoke with Duffy and Cboe CEO Ed Tilly about crypto and their companies’ interest in filling the breach left by FTX. Below are excerpts of those interviews, edited for clarity.
Q. It appears that CME has been fairly cautious with crypto in this phase. It hasn’t added a bunch of products. You’ve got the two. Would that be an accurate depiction, and if so, how have you approached this to date?
A. I approach it in a very conservative way. I believe—and I’ve said this publicly—there needs to be a use case for all products, and there is for everything CME lists. There’s a use case for food and energy, interest rates—and for crypto there needs to be a time where the use case starts to prove out. I haven’t seen that yet. I’m not saying it’s not going to happen. We’re very cautious as it relates to this asset class because I do believe there needs to be a use case; otherwise, it’s just a pure speculative contract, and that’s not what we want to have.
Q. What, writ large, do you think that use case is and what crypto’s potential is?
A. I don’t know what crypto’s potential is. I think the technology that crypto runs on, which is the blockchain technology, is something that I believe, done properly, can eliminate a lot of friction in payments.
Q. Let’s take the crypto side of it. What’s your feeling about what it might be useful for and what its potential is?
A. I don’t want to speculate on what its use case is as far as what payments it’s being used for today. Because I think if you do a study—and these are not my words, these are some government studies—I think there’s a lot of people who think that a lot of the use case for bitcoin and some others has been for nefarious reasons, and that’s not a good use case, right? That’s not healthy.
So the way I look at it, I think governments that want to support crypto trading, whether it’s bitcoin, ether or others, need to be more involved with the currencies themselves and have a say in them. You can’t just have a handful of people determining what the value of finance is that they’re creating in their basements.
Q. Does it need to be regulated?
A. I do believe regulation lends credibility and helps the world advance and you can hopefully take out some of the unscrupulous people. The problem is, if people are hellbent on trying to commit fraud or Ponzi schemes, and I’m not suggesting anyone in that system is, but if they are—just look at history—they don’t go away, they just keep coming at you. People are hellbent no matter what.
Q. What is your prediction then of what is going to occur in Washington on this?
A. One of the things I’ve learned not to do is predict. I manage risk, and that to me is what lends to the credibility of CME. We manage risk. We don’t participate in the market. We don’t care if it goes up or down. We’re here to manage the risk for the people who do care if it goes up or down. That’s an envious position to be in because that lends to the credibility of the products you’re listing for trade. People know that you are not in a conflicted position to participate.
If asked to participate (in Washington), I’m always happy to. I’ve testified in Washington probably more than anybody in financial services, so I’m happy to do it again if they ask. If they don’t, I’m OK with that as well. I would say this: I’ll give you an opinion. I do believe that the caution flags on the racetrack are out right now, and if people believe that they’re going to continue on a pace that they’ve been on the last couple of years, I think they’re kidding themselves.
There’s a lot of questions that need to be asked and answered as it relates to the latest debacle. If anyone’s looking for a clear, quick, concise answer to what’s going to happen, I think they’re crazy.
Q. I think there’s a sense that crypto is at an inflection point. If it’s going to be something that has a future, to use kind of a loose phrase, some of the adults are going to have to get involved. Whether that’s CME and Cboe, whether that’s some of the banks, custodial banks. Would you want to be part of that group of adults that helps sort that out?
A. I’ll say it again. I do believe that if cryptocurrency is to have a future, it needs to have a use case around it. Not too dissimilar to when credit cards came out or paper checks. When we got rid of the gold standard and went to paper money, that was more efficient. If this is more efficient and there’s a use case to the product, then you need to have central governments involved. You can’t have individual people setting the price of these cryptos. I also believe if crypto is to survive in the long run, you can’t have 1,000 of these things. You’re going to get down to a couple if it’s going to be successful.
Q. Let’s bring this back to CME. If it turns out this has been a serious bump in the road for something that, whether the use case gets proved out or not, turns out being a thing that people do, would CME be interested in providing for trading in the tokens themselves or would it limit itself to the derivatives?
A. I think about a lot of things, but I won’t comment on that because that would be purely speculation. As a public company, I’m sure you can appreciate that. Those decisions have yet to be made or discussed at a point where I’d be ready to commit to something like that.
Q. Obviously, we’ve got a lot of very sophisticated investors who’ve been embarrassed about how much money they’ve lost on this.
A. I don’t know if they’re embarrassed. I really don’t. The only thing I’ll agree with what Bankman-Fried has said is that venture capitalists know that there’s a ton of risk to the downside. I just don’t believe they think they know there’s a ton of risk to the downside when people are potentially not running the companies properly. They understand that the ideas fail, and that’s OK, but they shouldn’t fail because of bad behavior or a lack of understanding what the hell’s going on in your own organization.
Q. That’s due diligence, right?
A. That is due diligence. You know, when somebody’s walking around with a gimmick in shorts and a T-shirt or in the case of Theranos a turtleneck and a weird voice, I think that normally if they have a gimmick, they’re selling a gimmick. I’m a little surprised more people didn’t ask for the due diligence of this thing and got kind of sucked into the whole FOMO or whatever it’s called.
Q. They were talking about putting it in 401(k) plans as an option for people.
A. That’s the inflection point that I think is more important. I think that the people who’ve talked about, whether it’s Fidelity or others that were offering this into their 401(k)s, that’s the point where people go, wait a minute. Everyone’s talking about how little they lost as it relates to the amount of money they’re managing. What if it kept going? What would the percentages have looked like in six months? Six weeks? Six years? I don’t know. You’ve got to imagine they’d be bigger than they are today. So I think that’s a bit of a misdirect for some of these people saying “it’s a couple basis points on my portfolio.” Yeah, what about tomorrow? It could have gotten a lot worse.
Q. The other side of the coin, so to speak, is the demand. If there’s a demand to trade something, and you don’t quite see what its usefulness is, but yet there’s that demand there, is it your philosophy that if I don’t see the use, someone else can meet that demand?
A. If there’s demand to participate in a product, what is the product? The product to me goes from a security or a future to a roulette wheel. There are different regulations in gambling than there is in my world. If it’s a store of value, then it should have some kind of use case. Right now, the way I look at bitcoin, there is no use case for it at all. I guess I’m hopeful. And the reason I’m listing it is I hope there is a use case for it, and if there’s not, I’ll have to re-evaluate with my team what we want to do going forward.
I’ve been asked the question, when does that day come? I don’t know. I guess we’ll have to see what unfolds. There’s a lot to unpack with what’s going on from a regulatory standpoint. There’s a lot to unpack with how decentralized finance wants to move forward.
I said earlier, payments and friction is very important. Do we need to have stablecoins and cryptocurrencies in order to eliminate that friction on the blockchain from a payment methodology? If we do, does the government need to make sure they’re involved? I believe they do. I think the Federal Reserve needs to be involved in that, as does the U.S. Treasury.
If they want to call it United States bitcoin or the U.S. stablecoin or whatever, as long as there’s a stamp of approval and oversight by both Fed and Treasury, then I think the use case can be proved out and we’ll continue to list that for trade. No different than we list the dollar or the euro and other currencies today.
Q. Looking at the crypto world collapsing around its ears, what’s the opportunity for exchanges like CME and Cboe?
A. I only listed two products for a reason. Because I still don’t know. It’s hard for me to put a valuation on what I think the opportunity is. I can look at every one of my asset classes and look at what I think the opportunity is as I go through the years.
I’ll be honest, I did not want to list it. As I went through my progressions, I said, damn it, we have to list this because I need to understand if there is an opportunity for the future and we need to learn from it. One of the things I said at the beginning when we listed it was, if it’s not successful, that’s OK. If we learn, if there is a future in this, then we’re better off for it. It’s unfortunate. It’s five years later, and I still don’t have that answer yet. Maybe I can answer that question better in 12 months than I can today.
Q. We’ve seen so much negative stuff happen just as you were making the bigger plunge into the sector. What do you think the potential of crypto is at this stage?
A. The crypto winter and any rotation in an asset class on its valuation, we don’t try to predict that, just as we didn’t try to predict the broader market in the U.S. in and around changing interest rates, supply chain issues, war in Ukraine—we don’t get into the business of predicting asset class movements.
So no, we did not see crypto winter. We did not see FTX coming and unfortunately we weren’t able to play a role in diverting those customers towards a better platform. That’s the business we’re in today; that’s what Cboe Digital sets out to do. There’s still a desire for that exposure. I don’t think that goes away. There’s an ebb and a flow by asset class that we’ve seen before. I don’t see this as any different. I see a cyclical movement here, and interest I think will be around.
Q. The timing of your full-fledged plunge into the sector is that FTX was such a significant platform and now that it’s gone and here you are with this platform, it’s potentially fortuitous for you, is it not? Making lemonade out of lemons or something like that?
A. There’s an incredible amount of work to rebuild confidence. Your risk in any asset class exposure, we think, should be with your opinion and the actual movement of that underlying asset class, not in the infrastructure on which you either trade or the assets are held. Unfortunately, that’s proving to be as risky as the class itself, and that from our perspective has no place in the broader financial services industry. As a global exchange operator, that’s just not what we do. We need to eliminate that risk. So, yes, I think there’s opportunity to be the trusted market.
Q. That gets to the question about regulation and the need for it. I would assume you’re in favor of the federal government setting up some sort of regulatory regime for this. I’ll just ask broadly what you think needs to happen and what role you might play.
A. ErisX was founded with regulation and oversight in mind. And Cboe operates globally with regulation and transparency in mind. So, of course, that’s very consistent. The role we would play would be following the move and a couple of ideas that Congress has in front of it on regulation we support. So regulate my platform—we are all in and all for it.
The rigor at which our regulators look at our operations, this will be nothing new for Cboe. We expect it and we embrace it. Our role is to make it easy as an exchange operator for our regulators to learn as we go. Are we going to get this right the moment we jump into regulation and oversight of crypto more broadly? Probably not. Like the U.S. market structure, it needs to evolve. And our role is to provide as much information to the CFTC and SEC as we possibly can.
Q. What do you think the chances are that the next Congress does something along these lines, where you have Republicans in charge of the House and Democrats in charge of the Senate, a presidential election in two years?
A. We’ve found the committees that are charged with safety and protection for investors pretty bipartisan, which is really refreshing from an operator’s perspective. I’m actually optimistic that something moves forward.
Q. And you guys, I assume, will be participating in that debate?
A. We’re participating in the debate to the extent we’re invited to participate. In the meantime, we have pending at the SEC a rule filing for the approval of margin futures in the traditional way.
Q. Terry Duffy’s position of not understanding the use case for cryptocurrencies—what’s your feeling about that aspect of it? If there’s an interest in trading and investing in this asset class, isn’t that what an exchange kind of does?
A. You actually answered the question the way I’ve answered it in the past. My opinion on any of the thousands of stocks we list, the ETNs we list—my role as an exchange operator is to make sure the trusted market, the one that you want to represent an opinion, you’re able to do so fairly, equally and with equal access to everyone else that wants to express an opinion. That’s my role.
I don’t need to have a value idea on bitcoin, whether $60,000 was too much or $16,000 is too little. I find that all interesting. But not a whole lot different than the value of any other commodity or security depending on how the coin is classified. So I don’t give my opinions on any investments that we make available on Cboe other than we stand behind, our board supports and our associates work toward that trusted market.
Q. You see this as a significant opportunity for Cboe. Can you give me some sense as to how big you think that opportunity is?
A. We don’t really guide to size. I think the statistics you have at your fingertips are the same as mine, in terms of dollars traded. What is more interesting for me now is where I find the U.S. market, the one we’ve chosen to operate Cboe Digital as its first foray. How regulation can keep up with more regulatory-forward jurisdictions.
Q. Before everything that happened this year, the potential here looked like it might be a really big pond and you guys and maybe CME and some others that weren’t doing this as long as FTX were going to be getting pieces of that big pond. You may end up being big fish in a smaller pond depending on how all of this plays out.
A. It’s a good question. You’re getting a little bit into market structure and fee structure, which I’m happy to explore with you a bit. It is the difference of how we charge for transactions. In the U.S., for example, it was just per contract or per share. If you go to Europe, it is notional value, and we look at fees that way. If the fees are tied to the notional value of the underlying asset, of course we’re down 60% in bitcoin. But if you’re (charging per contact or share), I’m a lot more indifferent as to the price of the underlying. It’s a little early to judge the size of the success if you’re looking at just the level of the underlying asset.
Q. What’s your fee structure now?
A. Not meaningful enough for global Cboe to be moving the needle. Working with the (investor) syndication we just put together (on Cboe Digital), fees are one of those topics we’ll be tackling very early on.
Q. How important is being in the spot part of the market to the success of all of this? What’s spot volume compared with derivatives?
A. In the U.S., it’s really more derivatives because of the lack of regulatory certainty. If you go to Europe, for example, spot’s larger. As an exchange operator, we believe we need to offer exposure to spot, margin futures and options on spot and on those futures, and then we have to encourage and work with issuers who are making that exposure easy and the wrappers called ETFs and ETNs. The way that flywheel feeds on itself is the secret sauce for success in an asset class and all around the best experience for our customers.
Q. When you look at what’s just occurred, what kind of market share do you think Cboe Digital could achieve, whether just in the U.S. or globally?
A. It’s not really a market share game. We’re such early innings. The share of the existing pie is only interesting. I think the pie grows with regulatory certainty; it grows with the flywheel. So it is not just build it or list it, and they will trade it. It is the quality of execution, lowering the fees and costs for exposure, the certainty of the exposure.
Q. Confidence, too.
A. It’s huge. The trusted market will just trade larger than it does today. So share today would be interesting. Share of what we envision, what we think the potential is, is just much bigger. I’ll take the same share today and the vision of the size I think this market can be.
Q. What happens if these efforts don’t bear fruit in the coming year or next few years? How big of a risk is that for what you’re envisioning here?
A. It’s big. It’s the speed then, a ramp-up. I think the speed at which we can offer other exposures and then the confidence that our partners have in launching other coins on their platform. And where does that exposure go if not for the list exchange? I think we don’t grow as fast and the lack of confidence as a result will hinder the potential and the growth. Things will always be better when exchanges who have a mind on that experience are involved, but it’s just going to be the rate of adoption and the rate of growth.
Q. When you talk to colleagues and peers of other established financial services companies, what do you see as their appetite for solving this problem? Bringing in the gray-haired folks, the adults?
A. I think the question that you and Terry debated, the use case, I think that’s a much more relevant topic for the group you described. I don’t want to put all of us gray hairs in the same category. But those that have a longer history, rightly so, of keeping their customers in mind have been a little bit more cautious.
But when we get involved and we describe the manner in which we’re going to allow the (crypto) exposure to be represented, there is a certain calming effect. It puts the use case aside for a bit, that the market their customers will be trading on is a trusted one. Again, it doesn’t answer the use case. But it allows for identifying that the risk really is in the exposure, not in the infrastructure. I think what’s unfolded in FTX. The difference with Cboe Digital is night and day.
Q. In the deal you did for ErisX, you had to take a big write-down. To what degree do you care about that, and does that play into the future of how you envision things?
A. I care a great deal on behalf of my shareholders. It’s important, first of all, that I follow all the accounting rules and the promises I made on transparency. So that is a required write-down. The model and the vision and the direction that we sought out on behalf of our shareholders to broaden our reach into a new asset class, I’m very much committed to the same direction we saw before the write-down. Look. You said it earlier. The FTX situation certainly allows us to rise as the exchange, Cboe Digital, where customers and our syndication partners can offer exposure into crypto.