Recently, FTX proposed crypto derivatives that would enable retail investors to make bets on Bitcoin without the need for a broker. The company has been seeking approval from the Commodities and Futures Trading Commission to grant it a license. However, Wall Street and traditional banks are against this idea as it might lead to market instability. 

FTX Exchange has been making an effort to enter the traditional market by introducing a crypto derivatives feature in the U.S. This new model is said to disrupt the traditional model of derivatives which are cleared through third-party brokers. 

FTX has already been using this model for its international exchange and has gotten approvals from various countries. However, the U.S traditional Wall Street industry has collectively opposed this derivatives model.

The CEO of the CME Group, Terrence Duffy declared the FTX derivatives would lead to a “market risk.” Although the model itself is only proposed for crypto derivatives, it would risk the whole market and can also sabotage investor protection. 

CME is widely known to offer derivatives that oppose FTX’s model. In a traditional market, derivatives are used in crypto and other less risky assets to prevent users from any huge losses. In the U.S, traditional derivatives are mostly used by those people who are not used to day trading, so brokers help them. 

Traditional market fears that FTX’s model might affect the already established system. Following the proposal sent by FTX, the traditional exchanges also sent a concern to CFTC regarding FTX’s crypto derivatives model and await a response. 

What is FTX’s crypto derivatives model?

FTX exchange is a crypto exchange that introduced a new technology that would remove the broker’s role from trading. It is an automated system built from an algorithm that would clear trades and leave brokers jobless. 

FTX first presented the crypto derivatives model in the international market. Now, FTX is making an effort to enter this model in the U.S. market as well. FTX CEO Sam Bankman-Fried said that this new model could revolutionize the American market completely with robust risk mitigation.

He claimed that FTX has always prioritized consumer protection and is continuously making an effort to save its users from huge risks in the crypto market. The company does regular checks on protections, disclosures, and suitability that exceeds any other exchange existing in the market. 

The traditional industry goes against FTX

In a panel discussion, Alicia Crighton, the Co-Head of Global Futures at Goldman Sachs opposed the idea of FTX’s crypto derivatives model by saying, “Auto-liquidation, or any type of liquidation, comes with significant responsibility, and there needs to be a certain amount of judgment that’s used in exercising that. While auto-liquidation is compelling when we think of risk and volatility  in the system, it is not the right answer in all instances and circumstances.”

FTX’s model leverages investors to supply capital and borrow funds from the exchange to make bets on Bitcoin. So, when the Bitcoin prices go up, the investors earn a profit. However, if the Bitcoin prices dip below the set margin, the brokers alarm the investor to add more funds that could cover the Bitcoin purchases before any risk, this is called a margin call. 

In case the broker fails to recover the purchases, FTX liquidates his role and takes away the money. According to experts, retail investors wouldn’t know what their position is since FTX liquidates as soon as the margin depreciates. 

The Wall Street banks declared FTX’s model to be risky and not transparent enough. Other than that, the banks also have a broker’s role in the currently existing derivatives model. They are responsible for making margin calls and preventing users from higher risks. 

FTX’s model removes the banks’ role from the trading market to an automated program. This will not only affect their business but it will also risk an already well-integrated market in which the U.S. economy trades. 

FTX responds to traditional banks’ concerns

After the sudden opposition raised by traditional banks and industries, FTX came forward to explain its derivatives model in more detail. The company argued that the automated program is built to notify investors when the BTC prices drop below the investor’s initial capital. 

Furthermore, the exchange’s platform closes investors’ positions and gives them enough time to make Bitcoin purchases. FTX also shared that it has $250 million to recover from the losses. 

Compared to CME or other exchanges, Crighton expressed: “I think [the FTX proposal] will help us to evolve the model. The model should evolve, but I do think where we probably end up is in some sort of a hybrid structure. We have to be cautious about how we do it, but I do think there is space for a hybrid model.”

This means some traditional banks might be considering the new model but they are still reluctant about it. Additionally, CFTC is yet to release the official decision for the proposal submitted by FTX. 

Amidst this harsh opposition and awaiting a response, how will FTX satisfy the concerns raised? This is a big challenge that FTX has yet to conquer.