UK Finance Watchdog Issues Warning on Crypto Derivatives

UK-asset-finance-returns-to-pre-recession-levelsThe U.K.’s financial watchdog has warned that companies offering services around cryptocurrency derivatives “likely” need to be authorized by the agency.

In a statement posted to its website Friday, the Financial Conduct Authority (FCA), said that although it doesn’t consider cryptocurrencies to be currencies or commodities for regulatory purposes, cryptocurrency derivatives may be financial instruments under current directives.

The statement said:

“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.”

The FCA continued to explain that it’s “likely” that companies seeking to offer derivatives linked to cryptocurrencies or tokens issued through ICOs will need to obtain authorization. The products mentioned include cryptocurrency futures, cryptocurrency contracts for differences (CFDs) and cryptocurrency options.

The agency added, however, that an ICO “may or may not fall within the FCA’s regulatory purview depending on the nature of the tokens issued.”

The FCA finished with a warning that states: “If your firm is not authorized by the FCA and is offering products or services requiring authorization it is a criminal offence. Authorized firms offering these products without the appropriate permission may be subject to enforcement action.”

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. This includes:

  • 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

While the FCA has been generally positive on blockchain technology, saying in 2016 that it does not plan to regulate the blockchain industry for now as it believes it needs “space” to grow, it has taken a sterner stance on cryptocurrency and ICOs.

In December 2017, the head of the authority, Andrew Bailey, warned bitcoin investors to be prepared to “lose all your money,” adding the risks are similar to gambling.

The same month, the FCA announced that it would gather evidence and conduct a deeper examination on ICOs. In a feedback statement, the regulator said it would carry out an analysis on the applicability of U.K. laws to the ICO funding model and assess if there is need for “further regulatory action.”

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