According to the Financial Times, the UK Financial Conduct Authority (FCA) is considering a ban on crypto derivatives. Cryptocurrency derivatives are believed to be inherently more risky than the underlying assets, and these derivatives include CFDs, options, and futures. The extra fees associated with derivatives add further volatility. The research referred to issues with “market integrity,” and probes are still ongoing into price fixing within the BTC market.
Potential FCA crypto derivatives ban
Earlier this year, a cryptocurrency working group was created to analyze how best to regulate the cryptocurrency industry, an industry that is proving very difficult to regulate, The working group was established by the FCA, the Treasury, and the Bank of England. When the study was finally released, it revealed some worries concerning the cryptocurrency derivative market, which is growing steadily. The FCA has stated that crypto derivatives could disrupt financial stability, though more consultations and research are to be done in 2019. The Financial Times, quoting the study, stated that –
“Given concerns identified around consumer protection and market integrity in these markets, the FCA will consult on a prohibition of the sale to retail consumers of all derivatives referencing exchange tokens such as Bitcoin, including CFDs, futures, options and transferable securities.”
The effect of banning crypto derivatives
Many within the cryptocurrency community are claiming that banning these derivatives would be a blow to the industry. But a ban on these crypto derivatives could prove to be a very responsible move by the regulatory authority. The nature of the derivative market is linked to fractional reserve banking, manipulation, and institutional money, attributes which cryptocurrencies were designed to replace. At the same time, derivatives could reduce the volatility of the underlying asset (positive news for bitcoin), though studies conflict on whether derivatives increase or decrease the volatility of the underlying product. The introduction of derivatives could be playing a role in the steady price of BTC within the USD 6,000 – USD 7,000 range.
Of more concern is the new proposal by British MPs that could heavily effect small blockchain startups with huge growth potential. This proposal has been criticized by business authorities and legal firms, with one report indicating that “bad regulation is worse than no regulation at all.”
Getting the regulatory balance right can be difficult. A light touch regulatory policy is favored by most, and this approach has been put forward in Japan with a recent self-regulatory policy. Banning crypto derivatives may not be as harsh as it sounds, given their potential to disrupt the market and the fact that the industry is so new.
Digital Nomad with an interest in Zen and Blockchain technology.
Law graduate with 3 years experience as a consultant in the capital markets industry and 4 years experience freelancing on UpWork as a Creative Writer.