On April 6, 2018, the United Kingdom's Financial Conduct Authority (FCA) published a statement on the "growing number" of UK firms offering cryptocurrency derivatives. Under the European Union's Markets in Financial Instruments Directive II (MiFID II), the FCA does not consider cryptocurrencies to be commodities or currencies for regulatory purposes, but the regulator believes that cryptocurrency derivatives may qualify as financial instruments.
"Firms conducting regulated activities in cryptocurrency derivatives must, therefore, comply with all applicable rules in the FCA's Handbook and any relevant provisions in directly applicable European Union regulations," explained the FCA.
"It is likely that dealing in, arranging transactions in, advising on or providing other services that amount to regulated activities in relation to derivatives that reference either cryptocurrencies or tokens issued through an initial coin offering (ICO), will require authorisation by the FCA." Readers may remember that in September 2017, the FCA issued a warning about initial coin offerings (ICOs), which it called "very high risk, speculative investments."
Today, the regulator provided examples and concise definitions of several cryptocurrency derivatives:
- "cryptocurrency futures – a derivative contract in which each party agrees to exchange cryptocurrency at a future date and at a price agreed by both parties
- cryptocurrency contracts for differences (CFDs) – a cash-settled derivative contract in which the parties to the contract seek to secure a profit or avoid a loss by agreeing to exchange the difference in price between the value of the cryptocurrency CFD contract at its outset and at its termination
- cryptocurrency options – a contract which grants the beneficiary the right to acquire or dispose of cryptocurrencies"
The FCA's statement arrived shortly after the regulator published a cautionary note about a Bulgarian cryptocurrency derivatives provider offering its products in the UK. That company, Olsson Capital, has been offering cryptocurrency CFDs, a notoriously volatile (and highly leveraged) type of product, which the FCA specifically warned against in November 2017.
In Europe more broadly, other regulatory authorities have also addressed the cryptocurrency markets recently. Last week, ETHNews reported on the European Securities and Markets Authority's decision to bar the sale of binary options (cryptocurrency-linked or otherwise) to retail investors and to institute a 2:1 leverage limit for cryptocurrency CFDs.
In December 2017, FCA chief executive Andrew Bailey said that the cryptocurrency markets deserve attention, but were not yet "prevalent enough" to constitute a "systematic threat." Bailey said bitcoin investors should "be prepared to lose all [their] money."