UK Financial Watchdog Issues Statement on Crypto Derivatives Providers

  • The FCA weighed in on cryptocurrency derivatives
  • The regulator's proposed measures do not impact cryptocurrencies directly

Countries including Australia, Japan, and India, each sought an individual approach to cryptocurrencies this week. As reported, both Australia and Japan have introduced measures for controlling activity behind cryptocurrency exchanges and initial coin offerings (ICOs).

Meanwhile, the Reserve Bank of India (RBI) has turned its back on cryptocurrency-related accounts, making it hard for Indian residents to trade crypto for fiat. The UK has taken on the approach of the former this week, as the country’s Financial Conduct Authority (FCA) published new procedures, aiming to ensure a higher degree of transparency.

FCA On Cryptocurrency Derivatives

A document published on the FCA’s website on April 6 states that while cryptocurrencies aren't regulated by the FCA, companies offering services related to cryptocurrency derivates will “likely” need the agency’s authorization.

Organizations that deal with cryptocurrencies to any extent, on the other hand, are subject to regulation. This, as regulated companies that offer some crypto must have that derivative come under the broader umbrella of their legislation.

The FCA’s announcement reads:

"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."

FCA

What's Under FCA Regulation

The FCA has specified what derivatives will be subject to regulation and authorization moving forward, as means of protecting individuals and investors compliant with their usage. These are:

  • Cryptocurrency Futures: Much like stock futures, these operate as a mutual agreement between the buyer and the seller to exchange cryptocurrencies at a future date at a set price.
  • Cryptocurrency Contracts for Differences (CFDs): A derivative contract secured in cash, CFDs allow both parties to avoid the losses which may happen due to peaks and troughs in the value of a cryptocurrency. Parties agree to pay the difference in price between the beginning and end of the CFD.
  • Cryptocurrency Options: Much like stock options, it's an agreement which allows the beneficiary to acquire or sell cryptocurrencies.

New regulations brought forward by the FCA indicate a higher level of security for those undertaking transactions in cryptocurrencies. The UK has wrangled with the legal quandary that ICOs represent for the last few years.

Going forward, any ICO launched and obtaining crowdfunding within the UK will likely require authorization and continued scrutiny by the FCA.

QuadrigaCX Co-Founder Traded Away Users’ Funds as Sole Operational Director: Report

  • More than $220 million worth of users' funds absconded-with by QuadrigaCX co-founder
  • Stollen funds used for trading on "competitor exchanges" - for a loss

Reportedly deceased QuadrigaCX co-founder Gerald Cotton withdrew customers' funds to trade on both spot and leveraged margin exchanges, incurring significant losses in the process, alleges the latest public report on court proceedings surrounding the incident.

The report, the fifth commissioned to the global accountancy firm Ernst and Young (EY) by the Supreme Court of Nova Scotia, found that a vast sum of cryptoassets were transferred from QuadrigaCX exchange wallets to wallets operated by “competitor” exchanges and controlled Cotton, between the period 2016-19. The vast majority of the transfers occurred under Cotton’s alias “Chris Markay.”

Specifically, 9,450 bitcoin, 387,738 ether and 239,020 Litecoin were said to be transferred from QuadrigaCX in this way, and the questionable transfers resulted in “overall trading losses” trading on both spot and margin exchanges.

An additional sum of 21,501 bitcoin was also transferred to an exchange wallet controlled by Cotton, although it is unknown precisely how much of this sum originated from QuadrigaCX wallets. The proportion is unknown because the wallet is held in an offshore location not obliged to comply with EY’s requests for full accounting details. EY added however, that this information has been given to law enforcement of the unspecified jurisdiction.

 

 

EY also claim that Cotton traded on QuadrigaCX itself, using what were likely false deposits of fiat currency to buy cryptocurrency on the platform and counter-trade customers. About 300,000 trades were made from these “unsupported deposits,” which helped beef up QuadrigaCX’s trading volume and trading revenues.

The EY report outlines some generally poor practices that seem to have enabled the scandal, includin poor Know-Your-Customer (KYC) standards enforced on the exchange, which enable the easy exploitation of the platform; no separation between users’ wallets and the exchange’s wallets; and a “significantly flawed” financial reporting and operational control operating infrastructure, which EY claim were largely directed by Cotton alone and in which “typical segregation of duties and basic internal controls did not appear to exist.”

An Unpaid Bill

The QuadrigaCX story has been so big as to make it to non-crypto media in Canada. It has recently been reported by the CBC that Cotton’s alleged exploits have left former customers in the lurch, to as much as $250 million (Canadian) of unreturned funds.

EY claim that roughly 76,000 users’ funds are stuck in limbo as, in effect, unpaid IOUs, and confirm a figure of $214.6 million CAD remains unpaid.