UK’s Financial Conduct Authority Issues Warning on Cryptocurrency Derivatives

The Financial Conduct Authority (FCA) released a statement on April 6, 2018, which mentioned that any firm that offers cryptocurrency derivatives needs to be authorized by the FCA.

While the FCA does not regulate cryptocurrencies, cryptocurrency derivatives are, however, “capable of being financial instruments under the Markets in Financial Instruments Directive II (MIFD II), although we do not consider cryptocurrencies to be currencies or commodities for regulatory purposes under MiFID II. Firms conducting regulated activities in cryptocurrency derivatives must, therefore, comply with all applicable rules in the FCA’s Handbook and any relevant provisions indirectly applicable European Union regulations.”

The FCA firmly mentions that it is the company’s responsibility to “ensure that they have the appropriate authorization and permission to carry on regulated activity.” It is a criminal offense if the FCA has not authorized the firm and they continue operations, continuing to offer products or services about derivatives that reference cryptocurrencies.

Authorization on Cryptocurrency Derivatives

The UK’s regulatory body defines cryptocurrency derivatives as the “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 authorization by the FCA.”


They explicitly mentioned cryptocurrency futures, cryptocurrency contracts for differences (CFD), and cryptocurrency options as the three examples that will require authorization by the UK regulator.

In this circumstance, a cryptocurrency future is defined as “a derivative contract in which each party agrees to exchange cryptocurrency at a future date and at a price agreed by both parties.”  A cryptocurrency contracts for differences (CFD) is “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.” The FCA also defines a cryptocurrency option as, “a contract which grants the beneficiary the right to acquire or dispose of cryptocurrency options.”

In their statement, the FCA also provided visitors a link to the FCA’s general regulatory handbook and encouraged others to seek expert advice if there are any questions or doubts concerning the issue.

FCA Warns of the Risks of Cryptocurrency Investing

The FCA also warned the public in November 2017 of the risks associated with backing cryptocurrency contracts for differences (CFDs). They believe that cryptocurrency products are incredibly high-risk speculative products and therefore, cautioned investors of the risks involved.

While the UK’s financial regulator mentioned price volatility, leverage, funding costs, and price transparency as the primary risk factors, they also stated that any consumer is protected by the UK financial services regulatory framework since the FCA regulates CFDs. These protections, however, will not protect retail investors from any losses incurred from trading.

Although the UK’s regulatory body is optimistic toward the cryptocurrency industry and blockchain technology, the recent increases in scams and hacks force the FCA to tighten their rules and regulations to protect their consumers.

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