There are a lot of concerns about bitcoin as two exchanges prepare to trade futures on the unregulated cryptocurrency starting Sunday.
However, former market regulator Bart Chilton believes trading bitcoin futures will be safe and could actually help stabilize the cryptocurrency, he told CNBC on Thursday.
Chicago-based Cboe Global Markets is set to launch bitcoin futures on Sunday, and CME, the world's largest futures exchange, is planning to launch its futures product next week. Both exchanges are regulated by the Commodity Futures Trading Commission, which Chilton used to head.
"They know what they are doing in these markets. CME is the most liquid, diverse traded futures contracts around the world," Chilton said in an interview with CNBC's "Power Lunch."
"The quicker that we can get to some transparency, the quicker we can know who is in these markets — is it institutional investors, is it individuals — then the underlying [bitcoin] will also have a little bit more stability in it than we see now," he added.
Bitcoin has been on a wild ride over the past few days, soaring above $19,000 for the first time on Thursday before falling sharply. At 3:13 p.m. ET, it traded at $15,981.14 on the Coinbase exchange.
The volatility has led to some concern over the cryptocurrency and bitcoin futures.
The Futures Industry Association, a global organization representing 64 clearing members, sent a letter to the CFTC on Wednesday laying out concerns about that volatility as well as the risks clearing firms will have to absorb if there is a default.
Chilton said the CME and Cboe know what the risks are and are very adept at setting their margins, which are constantly adjusted in things that are more volatile.
The CFTC has said that government regulation aims to preserve the integrity of the contracts.
The exchanges are looking at the underlying cash contract to make sure it's not manipulated," Andrew Busch, chief market intelligence officer at the Commodity Futures Trading Commission, told CNBC. "Our role as a derivatives regulator is to make sure that the futures contract is not manipulated. We're going to do that for sure."
Chilton has long been a proponent of regulating the digital currency, which has no central authority. Its transactions are recorded in an anonymous public log called the blockchain.
"It doesn't have to be a full-throated regulation that thwarts innovation. I support digital currencies. But there needs to be some consumer protections," he said.
Notable critics such as JPMorgan Chase CEO Jamie Dimon have called bitcoin a "fraud."
— CNBC's Matthew Belvedere and Patti Domm contributed to this report.