Today the Monetary Authority of Singapore (MAS) announced a consultation to consider the regulation of derivatives based on “payment tokens” such as Bitcoin and Ether, where the derivatives are traded on Approved Exchanges.
The purpose of the potential regulation is to have sufficient oversight to prevent systemic risks to the broader financial system in case something goes wrong on one of the Approved Exchanges. MAS will allow crypto derivatives trading outside of these exchanges because it believes the volumes do not currently present a systemic risk.
There are four Approved Exchanges: The Singapore Exchange (SGX) which has separate securities and derivatives exchanges, Asia Pacific Exchange, and ICE Futures Singapore. The U.S. crypto derivatives platform BAKKT was founded by ICE, and last week Coindesk reported that ICE Singapore is discussing listing cash Bitcoin futures with MAS. This might be the trigger for the consultation.
The logic behind it
Cryptocurrency prices are notoriously erratic. Some derivatives, particularly options, are even more volatile. Derivatives are traded on margin, and the leverage ratchets up the risk. However, for institutions that also trade the underlying assets, derivatives enable risk hedging and hence are desirable for institutional investors.
There’s another angle. Bitcoin and Ethereum are unregulated and as MAS puts it “there have been allegations of fictitious trades, cornering and market manipulation.” Hence, potentially derivatives could be traded on a regulated market with better supervision.
That said, if derivatives are based on an underlying manipulated asset, the pricing of derivatives will be impacted. However, MAS argues that derivatives in other jurisdictions have instilled some market discipline in the underlying prices, perhaps because exchange audits were required for price references.
Examples include Bitcoin futures from the CME which plans to launch options shortly. ICE-owned BAKKT also runs Bitcoin futures with ‘physical’ delivery.
While MAS is keen to accommodate institutional investors, when it comes to retail investors, it’s a different story. Outside the world of cryptocurrencies, binary options have resulted in massive losses across the globe for retail investors who don’t fully appreciate the risks. That’s why in the U.K. the Financial Conduct Authority is likely to ban cryptocurrency derivatives for retail investors.
But MAS is looking for a middle ground. One option is to impose margin payments on retail investors to make it less attractive. It has suggested the margin should be a minimum of 50% and strongly advises retail investors not to trade in these derivatives.
The regulator is looking for responses to its consultation by December 20th.