What Is One Of The World’s Largest Derivatives Exchanges Doing With Bitcoin?

CME Group started more than a century ago in Chicago as a place where farmers could lock in prices for their crops. Today, its exchanges — CME, CBOT (Chicago Board of Trade), NYMEX (New York Mercantile Exchange) and COMEX (Chicago Mercantile Exchange) — cover every major asset class, such as metals and energy and U.S. Treasury bonds.

And now it’s making a foray into bitcoin. This past November, CME launched both a once-a-day bitcoin reference rate (BRR) and a bitcoin real-time index (BRTI) that updates every second.

And this coming year, it will launch a blockchain-based digital gold product, Royal Mint Gold, with The Royal Mint, a 1,000-year-old institution owned by Her Majesty’s Treasury in the United Kingdom.

Leading these efforts at CME is Sandra Ro, head of digitization initiatives. Ro, who came to CME five years ago, began her career managing foreign exchange and mergers and acquisition risks, and now directs FX research and product development for CME.

In the first episode of Season 2 of my podcast, Unchained (Google Play, iTunes, Stitcher, TuneIn Radio), she talks about CME’s current and forthcoming work with cryptocurrencies and blockchain.

Sandra Ro, executive director of digitization at CME Group

Ro was introduced to bitcoin by a friend in 2012. Upon reading the bitcoin white paper by anonymous creator Satoshi Nakamoto, “I was immediately taken by the revolutionary potential of a global payments network based on a completely decentralized, peer-to-peer, open source protocol,” she says. “For me, that represented a way to move money or value, faster, cheaper and more efficiently than the mediums that are available today.”

However, upon digging into it further, she realized that cryptocurrencies could represent a new asset class, as they had attributes different from other major asset classes today. Ro says that three main characteristics include the potential to invest in bitcoin as an invest-able product, the fact that it can be used as a medium for payment, though not one backed by any sovereign state; and its ability to be used to move around value, the way that Ripple’s XRP token (a cryptocurrency like bitcoin but on Ripple’s, not bitcoin’s, network) is used to move euros and dollars.

“You now have a network that is able to tokenize brand new assets or create token versions of physical world assets and move them around in a virtual world,” she says.

As for blockchain, she says one of its greatest applications in financial services will be enabling the sharing of information. “That’s where you could have information that’s been traditionally siloed, shared across, say, CME and our clearing member or ourselves and an end user client,” she says. “Everyone could have a golden copy of a specific set of information, transactions, records, and when changes are made to a specific set of records, that will be readily available to that subset of the network.”

CME decided to launch the BRR and BRTI because “this is exactly the sort of thing that CME does, which is to bring transparency and price discovery to markets,” says Ro. “This is what we’ve done for a wide range of asset classes for more than 100 years.”

BRR aggregates the trade flow of major bitcoin spot exchanges — Bitfinex, Bitstamp, Coinbase’s GDAX, ItBit, Kraken and OKCoin — during a specific calculation window, once a day. It’s a transparent reference rate calculated against the U.S. dollar at 4pm London time and should be particularly useful to those who do over-the-counter trades.

The Real Time Index, which is published once every second, calculates the global demand to buy and sell bitcoin, reflecting the current and fair price of Bitcoin in USD. It should appeal to anyone who trades bitcoin that needs a live price feed.

CME decided upon these products so that the nascent bitcoin market could have pricing products based upon a sound methodology, governance and oversight.

Ro says its Royal Mint Gold product, which will launch in mid-2017, “will change the way traders and investors will trade, execute and settle gold.”

The product’s digital trading platform will operate 24/7, the way Bitcoin trades. “Unlike the traditional physical spot cost model for investing in gold — the management fees and ongoing storage charges — RMGs will actually offer ownership of the underlying gold with the option for conversion to physical gold with zero storage costs,” says Ro. “That’s significant from an investment standpoint.

Tune into the full episode (Google Play, iTunes, Stitcher, TuneIn Radio) to find out what Ro thinks bitcoin’s main usability problems are, which other cryptocurrencies have piqued her interest, and what other physical world assets she thinks could be traded by blockchain.

Plus, she reveals what obstacles and challenges she believes could doom cryptocurrencies and blockchain to failure, and what aspects of cryptocurrencies and blockchain she is most excited about.