Standard & Poor’s, Moody’s and Fitch Warn They May Downgrade Financial Institutions Exposed to Bitcoin Futures

The three biggest agencies relied upon to assess the credit-worthiness of banks and investment products -Standard & Poor’s, Moody’s and Fitch- have indicated they may downgrade scores of institutions that clear Bitcoin futures contracts or have exposure to the clearing of them, Risk.net reports.

Last December, the Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) both launched cash-settled Bitcoin futures products, a move expected to help usher in institutional trading of Bitcoin by enabling more risk-averse investors to hedge.

In mid-December, the price of Bitcoin reached an all time high of close to $20 000 USD. Today, it’s trading around $6300 USD.

Some thought futures would help stabilize volatility in Bitcoin trading prices, but that has not seemed to be the case.

Last week, news emerged that the CFTC (as part of a joint investigation with the US Department of Justice into cryptocurrency price manipulation) announced it had subpoenaed four American cryptocurrency exchanges tapped to provide reliable spot prices the CME uses to settle its futures contracts.

The CME reportedly complained to the CFTC, its regulator, that the exchanges were refusing to cooperate with the CME and provide comprehensive data on trading practices on their exchanges.

The exchanges said that the information was proprietary.

Rumours of widespread wash trading and spoofing of (especially smaller and more illiquid) cryptocurrencies on relatively unregulated cryptocurrency exchanges have circulated like an open secret since Bitcoin’s early days.

Anonymous traders have bragged about these practices on social media, though exchanges and others have questioned how much individuals or small conspiracies can pull the water and draw up prices of globally-traded assets like Bitcoin, which currently has a market cap of about $107 billion, according to Blockchain.info.

It now appears that ratings agencies, perhaps eager to protect reputations they damaged by giving insolvent AIG and Lehman Brothers Banks A ratings just before the crash of 2008, are warning financial firms to steer clear of overexposure to Bitcoin. The ratings agencies have been slow to embrace Fintech innovations in general. Online lenders were slowly brought into the fold only after establishing a good amount of track record for the agencies to review. Just last month Fitch posted that centrally cleared cryptocurrency derivatives could be a real-world test of clearinghouses’ margining and default procedures, particularly if derivative notional volumes increase and cryptocurrencies exhibit heightened price volatility.

Part of the concern, says Risk.com, is a lack of historical data on Bitcoin.

The asset known as ‘digital gold’ was created in 2008 by a pseudonymous cryptographer and circulated among supporters eager to experiment with creating an internet-based monetary system independent of state and central bank oversight.

The first Bitcoins traded at fractions of a cent, and incredible returns since have attracted much interest.

Meanwhile, thousands of other cryptographic “currencies” and tokens, many of them poor knock offs of the original system, have attempted to mimic or extend Bitcoin’s utility, or simply cash in.

To this day, Bitcoin remains experimental, and legislators across the globe are now negotiating how to best regulate cryptographic, internet-based currencies and securities.

Until recently, Bitcoin has been mostly favoured by finance, tech and cultural outliers seeking an financial alternative and avenues for innovation.

The latest news from the ratings agencies shows the difficulty associated with a punk currency (and many poseurs) trying to put on a suit.

Financial Institutions are underestimating how trading Bitcoin futures could put them at risk, both in markets and with ratings agencies, says Global Head of Non-Bank Financial Institutions at Fitch Ratings, Nathan Flanders, “and is something that we think is perhaps not fully appreciated by the market and something that warrants monitoring going forward.”

Risk.net reports that a total of $144 million worth of open (unsettled) Bitcoin futures contracts are sitting on both the CME and CBOE as of June 8th.

According to Risk.net, Ana Arsov, managing director at Moody’s, warned that if crypto markets and bank exposure grow considerably, “that would be credit negative.”

The sentiment was echoed by Flanders:

“If the notional materiality increases, that is going to increase our dialogue with the banks,” he said.

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