The UK Financial Conduct Authority (FCA) recently moved to ban the sale of crypto derivatives to retail users. The Watchdog cited the risks associated with the asset class, including their volatility and crypto retailers’ inability to understand the sophisticated products.
The FCA’s decision is now sparking debates in the US over whether regulators in Washington could follow suit and ban crypto derivatives to retailers.
According to Robert Hockett, a professor at Cornell Law School US regulators could emulate the FCA’s restrictions. He believes that such a ban would protect unsophisticated crypto investors and mark a step toward preventing a financial crisis.
The professor compared the crypto derivatives market to mortgage-backed securities. These derivative products bundled residential mortgages, and in part contributed to the infamous 2008 financial crash.
Ariel Zetlin-Jones, a professor at Carnegie Mellon University, shared Hockett’s sentiments, asserting that watchdogs should prioritize investor protection when it comes to derivatives linked to cryptocurrencies.
“These derivatives markets are extremely complex. Although the cryptocurrency exchanges that create them market them as easy to understand for retail investors, I think they’re anything but,” Jones commented.
However, the professor sees the importance of these products in making crypto more liquid, leading to fairer prices for the underlying assets.
US Ban on Cryptocurrency Derivatives is Unlikely
Zetlin-Jones went on to dismiss the idea that the US would follow the UK’s lead and limit retail access to crypto derivatives. He argued that the investment product is already widely popular in the US and is available through many regulated exchanges and trading platforms.
For the most part, only institutional investors such as hedge funds traded derivatives. Therefore, banning access to these products for retail investors is likely to have little impact on the market.
Another reason why a blanket ban for sophisticated crypto derivatives is unlikely in the US is that regulatory frameworks already exist. Indeed, the Commodity Futures Trading Commission already limits retail investors’ access to derivatives swaps and mandates that such products only be offered by regulated exchanges.
As we reported, the UK ban is likely to have little effect on crypto derivatives trading. According to the IG group, a regulated broker offering crypto derivatives to retail investors in the UK, the restrictions by the FCA will only affect about 1% of their revenue.
A ban on crypto derivatives seems ineffective, as retail investors barred from trading crypto would shift to unregulated offshore exchanges.
Crypto Derivatives Gain Momentum in The US
The crypto derivatives sector is flourishing in the US, with more traders seemingly attracted to this high stakes venture.
The growing interest in the product prompted Binance-backed derivatives exchange FXT to enter the US in April of this year.The FXT platform plans to launch a dedicated spot exchange to offer perpetual contracts to US citizens. Traders now have access to diverse futures trading products such as TRUMP and oil futures trading.
Banning crypto derivative products would be unfair, according to Thomas Chippas, CEO of ErisX. The CEO spoke out against the FCA’s ban, arguing that it holds crypto products to a different standard from other complex investment vehicles.