UK issues guidelines for cryptocurrency derivatives

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It’s a step in the right direction. The absence of regulation, in the opinion of many, actually hurts the industry. However, UK regulators have now defined cryptocurrency derivatives, a decision that should help provide credibility to all digital currencies.

On April 6, the Financial Conduct Authority (FCA) posted a statement on its website that is directed to businesses that deal in cryptocurrency. According to the statement, crypto derivatives, such as futures, opts or contracts for difference (CFD), fall under the UK’s Markets in Financial Instruments Directive II (MFID 2). The MFID 2 is one of many reforms implemented by the European Union (EU) in January.

The FCA went on to explain that cryptocurrencies are still not legally considered currency or commodities, but that the digital currency, as well as initial coin offerings (ICO) are financial instruments that fall under its regulatory domain. The agency’s position mirrors that of France’s Autorité des marchés financiers, which announced a similar action in February. Other countries in the EU are expected to follow suit within the next couple of months.

Cryptocurrency CFDs track the price of the coin’s underlying asset. This information is utilized by investors in order to be able to apply for loans that are then used to make high-return cryptocurrency investments. Anyone can request a CFD, even if the individual does not already have any stake in the target cryptocurrency.

Just about two weeks ago, the EU’s markets regulator, the European Securities and Markets Authority, changed how CFDs could be issued. Previously, investors were only required to have enough funds to cover 20% of the contract’s value, but this was raised to 50%. The high amount of volatility seen on the cryptocurrency exchanges spurred the agency to make the changes.

Futures have become a popular global trading vehicle. Financial powerhouses Goldman Sachs and Morgan Stanley joined two derivative-based exchanges, CME Group and Cboe, within the past couple of months, and both offer clearing futures contracts. The two groups decided to get on board after receiving a number of requests from its institutional clients.

Institutional investors have begun to show an increased interest in cryptocurrency markets, which should help cryptocurrency prices begin to climb. Coinbase already created a product specifically designed for its institutional clients called Coinbase Custody, and many anticipate that the investor segment will attract up to $10 billion.