Financial regulators in the U.K. are reportedly looking to outlaw cryptocurrency derivatives over perceived risks to retail investors. This move comes as the market continues to gain even more prominence against the traditional crypto spot trading.
While several financial watchdogs in different jurisdictions have proposed stringent regulatory requirements for cryptocurrency derivatives trading, an outright ban would be a first.
The Financial Conduct Authority’s (FCA) consultations do, however, fall in line with the recent trend of government authorities looking to exert greater oversight on the virtual currency market.
FCA Mulls Outlawing Cryptocurrency Derivatives
According to The Economist, the FCA may be about to place a blanket ban on cryptocurrency derivatives. The regulatory body has reportedly finished a round of consultations and will provide its decision on the matter in 2020.
For the FCA, cryptocurrency derivatives present a series of regulatory problems given that the base asset — cryptos are recognized as currencies. Thus, trading in their derivatives does not fulfill the requirements for hedging.
Usually, derivatives serve as temporary havens against sudden slumps in fiat currencies. It is FCA’s argument that cryptos are not stable enough for their derivatives to fulfill this purpose.
Rather than serving as an avenue for domiciling savings, U.K. financial regulators say cryptocurrency derivatives are being used as gambling devices. Thus, wild price swings in the spot market of cryptos cause massive liquidations in the cryptocurrency derivatives arena.
Bitcoin’s recent plummet by more than $1,000 at the back end of September caused over $64 million worth of liquidated BTC derivatives on the BitMEX. For the FCA, retail investors do not possess enough market savvy to effectively maneuver the crypto derivatives arena.
Commenting on reports of the FCA looking to ban cryptocurrency derivatives, Jacqui Hatfield of Orrick law firm told The Economist:
“This is a knee-jerk reaction. Crypto-derivatives are just as risky as other derivatives.”
As previously reported by Blockonomi, U.K. regulators have long been of a desire to ban trading in cryptocurrency derivatives. Since the start of 2019, talk of tighter regulatory scrutiny has given way to calls for an outright prohibition of the market.
Meanwhile, the crypto derivatives market has been booming with talk of institutional interest in the arena. Several crypto behemoths like Binance have even made significant efforts to enter the market, providing greater competition for the likes of BitMEX.
Regulators Keen on Robust Crypto Policing
While U.K. regulators wish to stamp out crypto derivatives, financial watchdogs in other jurisdictions have taken steps to enact robust governing laws for the market. In Japan, authorities have put leverages in their cross-hairs.
The country’s Financial Services Agency (FSA) has put in efforts to limit margin trading on crypto derivatives to leverage of 4X. The new crypto margin trading rule comes into effect before the end of Q2 2020.
Outside of margin trading, government authorities seem to be imposing more robust regulations on the cryptocurrency industry. Apart from national regulators, inter-governmental bodies like the Financial Action Task Force are also contributing to the increase in regulatory scrutiny of the virtual currency market.
Oftentimes, these increased regulatory measures with a considerable cost of compliance. Smaller crypto startups burdened with the significant uptick in overheads tend to run aground.
Already, small volume exchanges have announced decisions to shut down their businesses. These platforms say they did not suffer any security breaches but that they no longer find the current operating conditions favorable.
Even Facebook’s crypto foray hasn’t been without considerable pushback from regulatory agencies around the world. Such has been the extent of the pressure from regulators that the likes of PayPal and Visa are considering pulling out of the Libra Association.