ErisX CEO explains why partnering directly with large brokers will help them win the cryptocurrency exchange race

After obtaining a DCO license this week, ErisX is poised for a step into the futures market. The company has now acquired both DCM and DCO licenses, allowing them to both trade and clear futures.  

Competitors LedgerX and Bakkt are also planning steps towards similar derivatives. LedgerX obtained DCM and DCO licenses from the Commodity Futures Trading Commission (CFTC), while Bakkt is pursuing a license to operate as a trust so it can offer a one-month and one-day physically delivered bitcoin futures contract, which will be margined futures.

To set itself apart, Chippas said ErisX is betting on a partnership model as opposed to marketing directly to users. It's aiming at prime and big retail brokers like Fidelity and TDAmeritrade for those partnerships, and it's already lined up some of these intermediary partners. In the meantime, spot volumes have been building. 

The Block sat down with CEO Thomas Chippas, touching on the company's plans for a futures market, and how he plans to differentiate ErisX from its competitors.

Frank Chaparro: With this announcement, ErisX now has both its DCO and DCM. What else does the firm need to do before it launches its futures market?

Thomas Chippas: The next step between today and launch of the actual futures is a bit of operational work and putting things in place now that we have the order and the no-action letter. So there's just a number of things that we need to go through and show the Commission that we've done them. But stepping back for a moment, we've had a DCM since 2011.

I think there's been some confusion in some of the reporting of late, not necessarily by you all, about what these licenses mean. You have to have both parts. If you only have the DCM and you don't have the DCO, you can trade the futures but you can't clear them, meaning you would have to find somebody else to clear them for you.

So the nice thing about this is we control our own destiny now. We have the DCM and the DCO. And we'll be working diligently to finish up some of the technical and operational things we need to do, tick all the boxes, and we'll look to launch later this year with the physically delivered futures.

Chaparro: Since ErisX launched at the end of last year, a number of firms have announced new markets for bitcoin futures, including LedgerX just last week. How do you differentiate yourself from a platform like LedgerX, which is also offering physically delivered futures? 

Chippas: I don't like to talk a lot about what competitors are doing. That's their job. But specific to LedgerX, if you go look at the CFTC press release from last week, there's some differences to ours. And they don't have a DCO. Their DCO has not been extended to cover futures. So they went from being what's called a SEF, which is the ability to trade swaps, to being a full blown DCM, which gives them the ability to trade futures. But to the best of my knowledge, unless something happened between last week and now, they do not have a DCO allowing them to clear futures. They can only clear swaps.

Chaparro: We haven't touched base since the launch of the spot market in April. Can you share what volumes look like on the platform? 

Chippas: For us, it is building. We, as you know, have several large intermediary partners that we're working with. That's different than other spot markets who are direct marketing. You don't see ErisX on every bus, taxi and train station all around New York and Chicago and Washington. We're working with TD, Fidelity, Trade Station, et cetera. So we've had new customers coming in and volume slowly building. But you're really not going to see our volume start to pick up in leaps and bounds until we get those intermediaries on board, and that's where we're focused because we believe that's the right model.

Chaparro: What does securing those partnerships entail?

Chippas: Well, I mean there's technical integration of course, and operational integration and working with them to make sure that their customers are going to have a very positive experience. There's a lot that goes into a seamless, smooth experience today. And if you think about who those investors are that have that type of business today, it's a very positive experience for their respective customers. And we know that one of the big gripes from many retail customers with respect to the other crypto exchanges is customer service challenges, whether it's timeliness or sufficiency of support. And we already have some experts in that area, thankfully, as investors and partners. So that's where we're focused: Making sure the integration between what we're doing and what they're doing is seamless to the end customer who wants to trade.

Our thing, Frank, has been intermediaries in this space exist for a reason. And I know that is counter to the common crypto ethos, but for good reason these large intermediaries need and require their use. These large institutional asset managers need and require the use of the services these intermediaries provide. So we want to be able to provide it to them, so they can come into the market, as many can't right now until those services are available.

Chaparro: This has been a long process relative to other players in Asia that have been able to launch a derivatives platform in a few months. Do you think that exchanges and other firms in crypto operate too quickly relative to those in finance?

Chippas: Absolutely. Look, I think you hit the nail on the head there, Frank. It is totally different and before I became a Wall Street guy, the first half of my career was with software companies. So I know what the tech side is like. It's a very different ethos and a very different mentality. The fact of the matter is, the regulators and those that are charged with managing risk and protecting consumers, they're not going to look at Twitter and say, "We'd better go faster because of Twitter." There's laws on the books and they're going to follow them.