FCA Statement on Cryptocurrency Derivatives Firms

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The Financial Conduct Authority (FCA) has issued a statement for those firms that offer services linked to cryptocurrency derivatives, to remind that they must comply with all relevant rules in the handbook and provisions in European Union regulations.

Whilst cryptocurrencies are not currently regulated by the FCA, cryptocurrency derivatives can be financial instruments under the Markets in Financial Instruments Directive II (MIFID II). The FCA stated that it is likely that providing services that amount to regulated activities in relation to derivatives, either with cryptocurrencies or tokens issued through an initial coin offering (ICO), will require authorisation. This includes cryptocurrency futures, cryptocurrency contracts for difference (CFDs) and cryptocurrency options.

Firms are warned that offering products and services that require authorisation without having it is a criminal offence. Being an authorised firm and offering these products without the appropriate permission could expose them to enforcement actions. This means that firms dealing with these products should perform a thorough analysis of their arrangements and offering to ensure they comply with (and understand) their regulatory obligations. General guidance can be found in the Perimeter Guidance Manual (PERG) in the FCA Handbook.

This is the first official statement from the FCA to businesses dealing with cryptocurrency-based products, which highlights the fact the FCA is aware of the rapid growth this business is facing. This statement follows a consumer warning published last December about the risk of investing in cryptocurrency CFDs, which the FCA considers extremely high risk.

Whilst it is right to warn consumers, especially those who are not experienced, against the risk of investing their money in certain products, it is also true that the popularity of cryptocurrencies can no longer be ignored. From this perspective, Mark Carney’s speech at Edinburgh University last month seems very sensible. In fact, when there is to choose between banning or regulating, “a better path would be to regulate elements of the crypto-asset ecosystem to combat illicit activities, promote market integrity, and protect the safety and soundness of the financial system.”