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Cryptocurrency derivatives are becoming an increasingly popular way for investors to get exposure to the crypto ecosystem without having to purchase digital assets on the spot market. Crypto derivatives regulations are of utmost importance for those who want to invest in cryptocurrencies in a safe and legal manner. But what are cryptocurrency derivatives regulations really, and are Bitcoin derivatives regulations any different from altcoin derivatives regulations?
Cryptocurrency derivatives are specialized financial instruments that derive their value based on the valuation of the underlying digital currency. Since Bitcoin is the most popular cryptocurrency, Bitcoin derivatives are the most common, but altcoin derivatives exist as well, especially for the major alternative cryptocurrencies such as Ethereum.
Futures give the investor the obligation and right to purchase a certain amount of a specific cryptocurrency at a predefined date in the future. In other words, Bitcoin futures allow people to speculate on the future price of BTC and making a correct prediction can mean a significant financial gain.
Options are a type of crypto derivatives contract similar to cryptocurrency futures, but with one important difference: while crypto futures gives the buyer a right and an obligation to purchase the underlying asset, options only include the right to buy, with no obligation.
Unlike futures and options which are derivatives with just a single underlying asset, swaps are a form of cryptocurrency derivative instrument with two underlying cryptocurrency assets. Swaps are linked to a ratio between two different currencies, for example, Bitcoin and Ethereum. In other words, trading swaps involves speculation regarding the future price of not one, but two different assets, which makes swaps one of the most complex crypto derivatives.
Traditional cryptocurrency exchanges such as Binance or Coinbase mainly allow the investors to purchase digital assets on the spot market. It’s the most basic form of making a crypto purchase: you simply buy a desired amount of cryptocurrency for its current market price.
Buying crypto on the spot market is quick and simple, and the purchased digital assets can be immediately withdrawn from the exchange to the user’s external crypto wallet. However, while this is considered an advantage by most retail investors, it poses significant problems for institutional investors such as hedge funds and investment firms, since in many jurisdictions cryptocurrency custody is still not fully defined legally.
Purchasing derivatives instead of buying crypto on a spot market can be considered a way of indirect exposure to the cryptocurrency market. Crypto derivatives regulations are very similar to stock market derivatives regulations, so a large number of investors consider it a more familiar method than buying BTC or ETH and transferring it to a cryptocurrency wallet.
For many years after the creation of Bitcoin in 2009, blockchain technology remained a very niche subject. The general public was completely ignorant of the existence of crypto, and Bitcoin was considered something more akin to a technologic experiment than a serious form of currency.
The days of unregulated crypto are long gone, and cryptocurrencies have gained a recognized legal status in most jurisdictions around the world. In other words, many countries subject digital assets like Bitcoin to taxes, cryptocurrencies are required to be disclosed during a divorce financial settlement and are generally subjected to similar laws and regulations as more traditional asset classes.
However, while the most popular cryptocurrencies such as Bitcoin and Ethereum are commonly recognized as a commodity form in most jurisdictions, and thus are subjected to the same regulations as other commodities, the situation is not so clear when it comes to many less popular altcoins.
Some of them might be considered unregistered securities, and some might not be legally recognized at all. Investors are warned against purchasing unregulated cryptocurrencies like that since buying them involves zero investor protection. In general, Bitcoin and Ethereum derivatives regulations make investing in these cryptocurrencies a safer option than purchasing less known digital assets such as DeFi tokens.
Laws regarding owning and trading digital assets such as Bitcoin or Ethereum vary from country to country, which may lead to confusion as there are still no uniformed legal standards shared globally. Cryptocurrency derivatives regulations avoid the problems resulting from the novel and unprecedented nature of blockchain-based currencies.
Simply put, the regulations of standard derivatives compare to cryptocurrency derivatives regulations are either very similar or exactly the same as the regulations involving any other derivatives. In other words, derivatives are instruments subjected to very strict rulings, regardless of what the underlying asset is – crypto futures are no different from lumber futures or gold futures.
Cryptocurrency derivatives regulations are still a very novel area of economic law. In many places where crypto is legal and cryptocurrency exchanges are allowed to operate legally, the investors are able to trade crypto derivatives. However, that is not always the case.
Cryptocurrency investors in the United States and the United Kingdom are prohibited from legally trading cryptocurrency derivatives. Bitcoin, Ethereum, and altcoin derivatives regulations are very strict, and exchanges operating in the US and the UK are not allowed by the law to offer crypto derivatives to their American and British clients.
Cryptocurrency derivatives regulations in the European Union are not as strict, and blockchain investors have an access to a large number of crypto derivatives including futures, swaps, options, and indexes.
The subject of crypto derivatives regulations cannot be analyzed without a broader context of general crypto-related laws and the legality of digital assets. In general, over the past few years, a visible global tendency towards stricter crypto regulations has gained traction, which naturally also impacts crypto derivatives.
Bitcoin derivatives regulations are still an evolving subject, but within the next couple of years, a worldwide consensus is likely to develop. It’s probable that more countries will follow the example of the United States and the United Kingdom and introduce more strict crypto derivatives regulations.