Dutch Officials Restrictions on Crypto Derivatives – Are They Necessary?

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Recently, Paul-Willem van Gerwen, head of capital markets and transparency supervision at the Dutch Authority for Financial Markets discussed the risks of cryptocurrency derivative trading, arguing that such transactions should be limited to the wholesale market.

Van Gerwen argued that those risks – including the tendency for market manipulation and criminal activity – offered evidence that the country should join the United Kingdom in banning retail access to options and futures of digital assets.

In a speech that was later posted on AFM’s website, van Gerwen said,

“I maintain that the trade in crypto derivatives should be restricted to wholesale trade.”

AFM hopes that it will gain power to propose such restrictions on cryptocurrency markets thanks to MiCA (Markets in Crypto-Assets Regulation).

I would submit that van Gerwen is zeroing in on the wrong focal point. Instead of focusing on the risks, it makes more sense to explore the benefits of crypto derivatives. Once you understand the benefits, there becomes a simple solution – regulate with an aim to mitigate the risks, rather than banning the activity altogether.

The benefits, in fact, are varied and many – including those that actually limit risk. Consider that derivative trading requires the utilization of arbitrage, necessary to certify that the valuation of assets is accurate. Further, many use derivatives to diminish the risks of fluctuating individual asset prices. Derivatives also allow investors to transfer risk to external entities.

Beyond that, retail investors can see significant savings based on low transaction fees. Comparing the fees associated with derivatives against those garnered through spot trading, there is a significant upside to the former. The problem with many regulatory bodies is that they see what is – or worse, what has been – while failing to see what could be.

The answer to the vexing regulatory problem of crypto derivatives? Leave yesterday behind us, focus on tomorrow. It is time for derivative exchanges to turn their focus on building a technology stack that can mitigate many of the risks long thought of as societally harmful. The time for action is now, and it is urgent.

Utilizing high frequency trading and machine learning expertise, exchanges should move to offer a platform that outperforms every regulatory expectation. It should be able to use deep insights to connect the dots within markets and between market participants, offering surveillance and risk management at every step of the trading process.

A technological answer to regulatory concerns should produce real-time alerts, which would flag bad actors’ attempts at market manipulation, abusive trading behavior and money laundering.

Such a solution should be able to provide comprehensive analytics and reporting, which meets ESMA (European Securities and Markets Authority) MiFID (Markets in Financial Instruments Directive) II, EU Market Abuse Regulation (MAR), US Dodd-Frank SEC (Securities and Exchange Commission) regulation and other global regulatory frameworks – including additional requirements that regulators may see fit to implement.

I would posit that the answer is not an outright ban on an instrument with extreme value. Instead, the answer is operational risk management. If derivatives exchanges opt not to implement the necessary technological infrastructure themselves, perhaps this opens an opportunity for regulators to look toward the future and require such implementation.

Richard Gardner is the CEO of Modulus. He has been a globally recognized subject matter expert for more than two decades, offering complex insight and analysis on cryptocurrency, cybersecurity, financial technology, surveillance technology, blockchain technologies and general management best practices.

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