On April 6, 2018, the United Kingdom Financial Conduct Authority (FCA) issued a statement on cryptocurrency derivatives (the FCA Statement) indicating that cyrptocurrency derivatives may be considered financial instruments under the European Union’s Markets in Financial Instruments Directive II (MIFID II), even though cryptocurrencies themselves are not currently directly regulated by the FCA unless they are part of other regulated products or services.

MIFID II, which came into effect in January 2018, sets standards for trading in “financial instruments” to “increase transparency, better protect investors, reinforce confidence, address unregulated areas, and ensure that supervisors are granted adequate powers to fulfil their tasks.”

The FCA Statement flags three types of instruments which may be “financial instruments” caught under MIFID II:

• Cryptocurrency futures contracts in which parties agree to exchange cryptocurrency at a future time at a mutually agreed upon price.
• Cryptocurrency contracts for differences in which parties agree to exchange the cash difference between the current value of a cryptocurrency asset and its value at a future time.
• Cryptocurrency options may also qualify.

Dealing in, arranging transactions in, advising on or carrying on any other regulated activity in relation to “a financial instrument” is subject to authorisation by the FCA to carry on such activity.

The FCA Statement suggests those who are unsure about whether they require authorisation to seek expert advice. It is the responsibility of firms “to ensure that they have the appropriate authorisation and permission to carry on regulated activity.”

Application beyond the United Kingdom

Statements by regulators regarding cryptocurrency derivatives are not unique to the FCA. In January 2018, the United States Commodity Futures Trading Commission (CFTC) released a statement on its Oversight of and Approach to Virtual Currency Futures Markets. The CFTC staff conducted a “heightened review” of the self-certification of Bitcoin futures by the Chicago Mercantile Exchange Inc. (CME) and the CBOE Futures Exchange (CFE). Bitcoin futures began trading in December, 2017.

In December 2017, the Investment Industry Regulatory Organization of Canada (IIROC) issued a Notice (the IIROC Notice) on the dealer margin requirements for cryptocurrency futures contracts. The IIROC Notice sets higher margin requirements for cryptocurrency futures than would normally be required under Dealer Member Rules. According to the IIROC Notice, Dealer Members must mark-to-market and margin cryptocurrency futures contracts daily at the maximum of:

(i) 50% of market value of the contracts;

(ii) the margin required by the futures exchange on which the contracts are entered into;

(iii) the margin required by the futures exchange’s clearing corporation; and

(iv) the margin required by the Dealer Member’s clearing broker.

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