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The US Commodity Futures Trading Commission has sent subpoenas to four cryptocurrency exchanges asking for trading data, according to the Wall Street Journal which cited people familiar with the matter.

Background

The exchanges are Coinbase, Kraken, itBit and Bitstamp. It is from these sources that the price of Bitcoin futures as sold by CME Group is determined.

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CME Group is a major financial company with many different lines of business. Relevant here is its exchange in Chicago that sells financial derivatives products such as options and futures. In December of 2017 it began selling futures contracts based on Bitcoin.

Futures are contracts describing transactions that are to take place at a future date. The buyer and seller of a commodity (which can itself be a financial derivative) decide on a time and a price and sign, and when that time comes the contract must be fulfilled. The first futures markets appeared in Europe in the 17th century, and currency futures were sold for the first time in 1972 at the International Monetary Market, which is itself a subsidiary of CME Group.

CME’s launch of Bitcoin futures was a pioneering step, playing a big part in bringing cryptocurrency into the mainstream consciousness. For these contracts, the price of Bitcoin is determined by taking an average of the price on the aforementioned four exchanges over an hour on the last Friday of the month.

Suspicions

Futures were originally designed to insure against price movements. However they can also be used to profit, because the parties to the contract must predict what a reasonable price for a given commodity will be in the future. For this reason, it is important to have accurate data regarding the price of the underlying asset – price manipulation can have the effect of rendering futures contracts invalid.

According to CCN, CME did request trading data from the four exchanges when it began offering the new product, but not all complied, and cooperation when received was limited. Reportedly, CME used a London-based exchange to calculate the price of Bitcoin.

The CFTC became suspicious of possible price manipulation as a result of this dispute. We have written before about suspected manipulation on the part of cryptocurrency exchanges.

Result

A CME spokesperson said that the CFTC and CME will be monitoring trading activity at these exchanges for that Friday hour to “determine whether individual trades distort the futures price”, according to CCN. The exchanges are expected to cooperate because under US law Bitcoin is considered a commodity, and thus the remit of the CFTC.

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