The Financial Conduct Authority (FCA), Britain’s financial watchdog, is gearing up to place an encompassing ban on the sale and offering of cryptocurrency derivatives, according to a report by The Economist. The report, which was published on October 3, revealed that the FCA is mulling over placing a restriction to prevent retail investors from purchasing cryptocurrency derivatives, pending its consultation with keep players.
Prices affecting performances
Derivatives and financial products have been rather popular in the crypto space this year. Besides the significant earning potential that they provide investors, they also show a legitimate side to the entire crypto space that insiders would like to see. The premise is simple; if traditional stocks and investment vehicles can have futures and options, Bitcoin and other crypto-assets should as well.
However, while they are great for those looking to establish Bitcoin as an investment vehicle, the dangers of derivatives and other crypto-denominated financial products are quite significant. Amongst many other things, Bitcoin remains highly volatile, and this means that investors are at a higher risk of losing money at this point.
This potential for loss has been depicted best over the past two weeks. On September 23, cryptocurrency investment Bakkt launched its physically delivered Bitcoin futures contracts, which provides investors with an opportunity to make bets on the price of Bitcoin at a specific time and earn (or lose) money based on the outcome.
However, while there was considerable anticipation for the contracts, performance since launch last week has been lackluster at best. Only 71 contracts were sold within the first 24 hours, and that number has so far dropped to 6 as at press time.
No guarantee for crypto in the future
The Economist also notes that apart from the volatility in crypto prices, the FCA is worried about the general, long term status of cryptocurrencies. The agency reportedly isn’t convinced about the future of cryptocurrencies, and is trying to shut down the derivatives space before more investors get into it.
Perhaps one reason why the FCA is so skeptical about the crypto derivatives market could be down to performance. So far, UK investors have lost around $492 million in cryptocurrency derivatives from mid-2017 to the end of 2018. During that period, only $31 million in profits were made. By placing a blanket ban on derivatives, they believe that they could eliminate about $289 million in losses. The report, however, notes that the decision by the FCA is expected in early 2020.
Uncertain times indeed
The potential ban on derivatives is coming at a time when the relationship between the British government and the crypto space is in uncharted waters. Many have called for regulations off cryptocurrencies in the past, and while there have been several steps in the right direction, things haven’t made any significant progress. The FCA ruled in July that it wouldn’t be regulating Bitcoin and Ether as securities and assets, although it would regulate utility and security tokens as such.
However, cryptocurrency businesses have continued to struggle to find their place in the country’s regulatory ecosystem. Now that derivatives could be banned, things could be plunged into a new low. For now, we will have to wait until early 2020 to see.