Earlier this month, Heath Tarbert – the new president of the CFTC – said Ethereum is a commodity, not a security. He stirred the enthusiasm of the community by stating:
“I would say you may see a futures contract in the next six months to a year.”
The market was excited because this would increase the interest of institutional investors for ETH. Derivatives allow for risk coverage, which is a significant part of portfolio management and solid support for long positions. A market full of derivatives, the reasoning continues, will encourage more investments, which will increase the price, which will encourage more investments, etc.
However, Coindesk’s research director, Noelle Acheson, argues that there are significant risks associated with ETH derivatives.
Very low volumes
Ethereum futures contracts are currently traded on international exchanges, but volumes have been reduced compared to the spot market. On BitMEX, Huobi and Deribit, three of the largest crypto platforms offering these options, the average 24-hour volume is less than 10% less than bitcoin futures. The ETH / BTC ratio on the spot market is almost 25%. Therefore, overall, the demand for Ethereum futures contracts is much lower.
Major changes to the Ethereum blockchain
Ethereum developers are currently preparing for a major network update. In theory, this is good news for the network, but in practice it can cause problems. Previously, another major update was postponed at the last moment due to bugs.
On the other hand, the Ethereum network will move from a proof-of-work consensus to a proof-of-stake. This means that ETH offers users credentials to validate transactions and add new blocks to the blockchain. In return, I earn an income.
In the PoS system, the rewards are distributed in the form of annualized interest, which could change the ETH status of the commodity into security. A securities-based derivative falls under the common aegis of the SEC and CFTC and makes investor access more difficult.
Possibility of canceling transactions
Another risk associated with Ethereum is the cancellation of transactions. In 2016, in response to a roughly $ 60 million hack of an ethereum-based application, the community decided to cancel the transaction to undo the effects of the hack.
Last weekend, Vitalik Buterin asked the community what value such a hack should have in order to make the decision to cancel the transactions. 63% of respondents said they did not agree with such a measure regardless of the value of the losses.
However, the question shows that such a change to the blockchain is possible. In this situation, ETH is a cryptocurrency far too malleable to receive approval for a derivative.
Therefore, given Ethereum’s development status and prospects, as well as little evidence that there is demand, it is unlikely to launch an ETH derivative on a US regulated exchange soon.