Developing new markets, especially when there is strong competition, is all about speed: not microseconds, but days, weeks or months.
It’s been proven time and again with failed exchanges that it simply took too long to get to the starting gate. Eurex US, the Eurex effort to compete with Chicago’s exchanges, which endured some foot-dragging and untimely Congressional hearings about a foreign company owning a US market, comes to mind. That delay among others bought some critical time for Chicago exchanges to recover and readjust, and Eurex US was dead almost on arrival. If there was a poll of how many new markets made a splash with an “Opening Soon” sign but then trailed off shortly thereafter, the list would likely be long indeed.
Beating incumbents and newcomers is one thing. Conquering bureaucracy and regulation is another. Gaining and maintaining momentum is yet another level that is critical to a marketplace’s success. Bcause, the crypto mining, spot and futures trading market, is the latest to hit the brakes, having recently filed for Chapter 11 bankruptcy reorganization.
What is admirable about Bcause is the scope and the vision of the enterprise, which provides a crypto mining facility for customers to acquire bitcoin. Meanwhile, the firm is also pulling together a spot exchange and a CFTC-regulated futures exchange and a clearinghouse to clear and physically settle those digital assets. That so-called crypto stack would be a one-of-a-kind marketplace. The issue is how much time and money that requires.
Bcause filed its paperwork with the CFTC on September 15, 2016, and it is still pending more than two and a half years later. This is not an indictment of the CFTC nor of Bcause itself. The company was one of the first movers in the space with its particular business model. The firm was also seeking a derivatives clearing organization license from the CFTC, which carries another set of requirements. Those two initiatives are now on pause.
On the spot trading side, there are no regulations. However, there are a number of licenses that are required, including state money transmitter laws, which allow for cash transfers across state lines. In New York state, crypto exchanges must apply for a so-called BitLicense, which is administered by the New York State Department of Financial Services. For firms looking to open an unregulated spot market the barriers are low and many exchanges across the US have done so.
Bcause is set to launch its spot market this quarter and will run on Nasdaq’s trading and surveillance platform. The futures and clearinghouse are now on hold. Bcause licensed Nasdaq’s institutional grade platform with high-end surveillance to attract top level participants to its market and avoid a lot of the nonsense that occurs on amateurish crypto platforms.
Meanwhile, the sector has indeed gotten crowded. LedgerX, which has regulatory approval to be a swap execution facility and a derivatives clearing organization, received its CFTC approval in July 2017 and launched physically settled options on bitcoin in October that year. It filed to be a designated contract market in November 2018 with plans to be the first to offer physically delivered bitcoin futures. Other serious contenders include ErisX, which plans to launch spot trading this quarter with futures in the second half of the year and Seed CX, a SEF that is aiming to offer spot and derivatives markets in digital assets.
Bakkt, the ICE subsidiary with about $182 million behind it, also has a massive vision for what it can be – a custody, retail transaction, spot and futures market and clearing ecosystem. And it too has seen delays in launching. That doesn’t even consider other spot markets such as Coinbase, Kraken and futures exchanges such as CME and Cboe Global Markets, which itself bowed out of the futures even though it was a first mover.
While the changing landscape has forced Bcause to pivot its value propositions somewhat, the bitcoin bear market didn’t help much either. Crypto analysts vary in their estimates, but when bitcoin prices plummeted to around $3,100 in December 2018 and hovered around $3,300 for months, the estimated breakeven cost was $3,850. Only if you are Tesla can you make math like that work for investors. Bitcoin prices are now around $5,500 and demand for mining has picked up again. Sources close to Bcause say some key power and technology enhancements lifted its profit margins for hosting mining operations substantially.
What tripped up Bcause, according to a company letter to shareholders and customers obtained by [[http://bit.ly/2KVf02U|ABC Channel 13 News]] in Newport Beach, VA, was a garnishment for non-payment. The letter stated “Wesco Distribution, Inc., one of the equipment suppliers in our mining facility, filed a garnishment order against the Bcause LLC Holding Company’s bank account. This action effectively froze our bank account, resulting in our inability to pay current obligations. Moreover, our inability to process payments from our bank account caused us to fall behind in payment obligations to our power provider at the mining facility in Virginia Beach, Dominion Energy. Dominion subsequently threatened to cut off the power to the mining facility. These circumstances resulted in a decision by the Board of Managers of Bcause LLC, to file a Chapter 11 petition for reorganization for the mining facility.”
Bcause declined to comment further.
By filing for Chapter 11, Bcause can still keep its mining operation open, hold off creditors so its can file a reorganization plan and launch spot trading on cryptocurrencies.
But sometimes the most difficult thing is bringing a marketplace to customers in a reasonable amount of time. If Bcause spot and futures markets had been running months before the bitcoin price plunge, it may have offset some of those mining costs with trading revenues. Instead it is now planning to regroup under Chapter 11 and, as it said in its letter, become “a healthier and more profitable company.”
Editor’s note: John Lothian Productions provided video production work for Bcause in 2017.