The UK’s financial watchdog, the FCA, has issued a new statement today, clarifying the regulator’s stance on offering cryptocurrency derivatives. The document outlines that companies providing cryptocurrency derivatives need to be authorized financial services providers.
Such instruments include cryptocurrency futures, CFDs (Contracts for Differences) and options. The move is cementing the stance of the UK regulator towards offerings outside of physical (or better said digital) cryptocurrencies.
The regulatory obligations of the UK watchdog currently do not include the cryptocurrencies themselves. At present no legal framework is available to mandate the FCA to supervise the distribution of the coins.
The FCA is not regulating cryptos if they are not part of other regulated products or services. This essentially means that brokers that are providing cryptocurrency trading services that are solely focused on securing ownership to the end client and act as intermediaries are not regulated in any way.
The complexity for firms arises from the need to warrant in any way shape or form that a given brokerage is really purchasing the product for its clients. Ensuring that this process is complete could be a nightmare for end-clients.
Cryptocurrency derivatives are designated as financial instruments under the Markets in Financial Instruments Directive II (MIFID II). That said, the FCA does not consider cryptocurrencies to be currencies or commodities for the regulatory purposes under MiFID II.
Companies that are conducting regulated activities in cryptocurrency derivatives must be in compliance with all applicable rules in the FCA’s Handbook and any relevant EU regulations.
“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 authorization by the FCA,” the FCA’s statement says.
Potential for Unregulated Crypto Scams
A growing list of binary options providers has shifted their operations into the cryptocurrency space. This creates a big risk for end-users as the ethical conduct of these companies is known to be fraught with irregularities. Imposing as exchanges, there is a big likelihood that such firms can cause irreparable damage to the reputation of the crypto space.
A given brokerage that claims to be purchasing cryptocurrencies on an exchange is not necessarily doing so and the end-client could be entering into a CFD deal without actually ever holding the physical coin that is being purchased.
Since the verification of such a transaction is difficult, consumers that are seeking exposure to cryptocurrencies might face a slew of unregulated exchanges and brokers that are accepting client buy orders only when a given digital asset’s price is falling and the reverse. Some companies formerly offering binary options products have already started offering “buy only” trading in cryptos.