(Bloomberg) -- Two U.S. exchanges, including the parent ofthe venerable Chicago Mercantile Exchange, are racing to embracebitcoin, dragging federal regulators into arealm skeptics call a fad and fraud.

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The development shows how some big financial players are movingto co-opt the volatile cryptocurrency and lure more mainstreaminvestors into the market, even before regulators have agreed onjust what bitcoin is.

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CME Group Inc.’s contracts will debut Dec. 18. Cboe GlobalMarkets Inc. didn’t announce a start date. Both got the green lightFriday after going through a process called self-certification -- apledge to the U.S. Commodity Futures Trading Commission that theproducts don’t run afoul of the law. The news pushed bitcoin’sprice higher.

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The moves are a watershed for Wall Street professionals-- including institutional investors and high-speed traders --who’ve been eager to bet on cryptocurrencies and their wild swings,but worried about doing so on mostly unregulated markets.

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The new products are subject to CFTC oversight. CME, Cboe andCantor Fitzgerald LP’s Cantor Exchange -- which is creating anotherkind of bitcoin derivative, binary options -- promised to help theagency surveil the underlying bitcoin market.

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“Bitcoin, a virtual currency, is a commodity unlike any thecommission has dealt with in the past,” CFTC Chairman ChrisGiancarlo said in a statement Friday. “We expect that the futuresexchanges, through information sharing agreements, will bemonitoring the trading activity on the relevant cash platforms.

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Trading in bitcoin and other cryptocurrencies is largelyunregulated, and that’s the point. Bitcoin was introduced in thewake of the 2008 financial crisis as a way of avoiding governmentsand central banks.

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Now with its meteoric rise and the proliferation ofcryptocurrencies, banks, brokers and mainstream investors want in.And they want regulation, something they’ll get plenty of in amarket like CME or Cboe’s.

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“The launch of the futures will actually make the markethealthier,” Cboe President Chris Concannon said in an interviewafter the news broke Friday. “It will create pricing equilibrium inthe market. Clients who are holding bitcoin now have no way tohedge their risk. These products allow them to hedge, and to takeopposing views. More importantly, it brings a wave of regulatoryoversight.”

Regulators’ struggle

U.S. financial regulators have struggled for years to agree onwhat, exactly, bitcoin is and what risks it might pose.

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That’s left its enthusiasts and financial professionals unsurewhich government agencies might try to police the rapidly growingmarket.

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In addition to the CFTC, there’s the Securities and ExchangeCommission, the Internal Revenue Service and the TreasuryDepartment’s FinCEN, which tracks illicit payments.

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The CFTC declared in 2015 that it would treat bitcoin as acommodity. “But the IRS says it’s property, the SEC said now somedigital currency is a security, and FinCEN says digital currency isa ‘money-like instrument,’” said Adam White, general manager ofGDAX, a cryptocurrency exchange owned by Coinbase. His companyis trying to work with all of them, he said, while offering his owndefinition: “It’s a new asset class.”

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After Friday’s announcement, exchanges and the CFTC will have tokeep tabs on that underlying market, according to Jeff Bandman, whountil June advised Chairman Giancarlo on financial technologyissues.

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“It’s well understood that bad actors can take actions in thespot market for a commodity where the reward or payoff is thederivatives market and vice versa,” Bandman, who now runs BandmanAdvisors, said in an interview before Friday’s announcement. “Thiswould represent a new opportunity for mischief.”

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Are ETFs next?

There are other ways the new futures could spur more vigorousoversight of the cryptocurrency. The contracts, for example, couldmake it easier to create an exchange-traded fund tied to bitcoin --even after a previous attempt was knocked down.

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That could enlist the SEC. In March, the agency rejected abitcoin ETF proposed by Tyler and Cameron Winklevoss -- theco-creators of the Gemini exchange -- saying necessarysurveillance-sharing agreements were too difficult given that“significant markets for bitcoin are unregulated.” Cboe is basingits futures on prices from Gemini.

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On Thursday, a top SEC official weighed in. David Shillman,associate director in the agency’s division of trading and markets,said a strong bitcoin futures market could make the regulator morecomfortable approving bitcoin ETFs.

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Many mainstream investors and their brokers -- lured bybitcoin’s meteoric rise this year -- wouldn’t mind some governmentoversight to head off potential abuses. But regulating thesefutures only works so well if the underlying market isn’t safe.

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“The problem with the futures contracts is they are regulatedderivatives that are based off underlying trading in unregulatedmarkets,” Richard Johnson, a market-structure analyst at GreenwichAssociates who specializes in blockchain, said before Friday’sannouncement. “That does create a potential problem.”

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Ever since digital currencies began emerging, U.S. regulatorshave faced a big dilemma: The laws that empower watchdogs anddelineate their areas of responsibility were written decades agowhen money was minted on paper, companies turned mainly to thestock market for capital, and commodities came from farms, mines orwells. Many authorities have held back, studying what todo.

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CME Chief Executive Officer Terrence Duffy sped up that processin October when he disclosed his plan for futures. His announcementof an imminent product caught some CFTC officials by surprise,according to three people with knowledge of the matter.

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The problem among regulators is that they each have roles withbitcoin, but that there’s too little coordination, said JustinSlaughter, a former top aide to a CFTC commissioner who nowconsults on financial technology and regulation as a partner atMercury Strategies.

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“It’s been very scattershot, it’s been somewhat confused,” hesaid.

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