April 06, 2018

FCA issued a statement on the authorization requirement for firms offering cryptocurrency derivatives. FCA also published a feedback statement that summarizes the feedback received, along with its response, on its consultation on the Distributed Ledger Technology (DLT). As indicated in the FCA feedback statement on DLT, cryptocurrencies are not currently regulated by FCA, provided they are not part of other regulated products or services. Cryptocurrency derivatives are, however, capable of being financial instruments under the Markets in Financial Instruments Directive II (MIFID II), although FCA does 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 Handbook and any relevant provisions in directly applicable EU regulations.

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 authorization by FCA. This includes:

  • Cryptocurrency futures, which represent 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), which 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
  • Cryptocurrency options, which represents a contract that grants the beneficiary the right to acquire, or dispose of, cryptocurrencies

To ensure whether a firm requires authorization, the general guidance of FCA on the regulatory perimeter in PERG may be helpful. It is the responsibility of the firms to ensure that they have the appropriate authorization and permission to carry on a regulated activity. If your firm is not authorized by 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.

 

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Keywords: Europe, UK, Banking, Securities, Authorization Rules, Cryptocurrency Derivatives, MiFID II, DLT, Initial Coin Offerings, FCA

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