By Steven Maijoor, Chair of ESMA France
After initially publicly slamming Bitcoin, some of the biggest names in investment banking have u-turned by launching their own cryptocurrencies this year. But for every CEO that has changed course, such as J.P Morgan’s Jamie Dimon, there is a Warren Buffet on the sceptical side of the digital coin.
The truth is right now, the only thing investors can bet their bottom dollar, or perhaps Bitcoin on, is that there is no agreed consensus around how to regulate the crypto market. Take one of the most contentious issues right now – the reporting of cryptocurrency derivatives.
Earlier this year, the UK Government said that the FCA is empowered to enforce bans on cryptocurrency derivatives if it “finds it necessary”. But why would any banking behemoth currently prioritise reporting crypto futures and options when there is no legal obligation to do so?
The industry may well be crying out for regulatory consensus, but until the relevant authorities can align, financial institutions will inevitably put reporting of crypto derivatives on the back burner.
However, the lack of a defined regulatory position, does not mean that firms should avoid getting their reporting houses in order.
At some point soon, given the size of the institutional names currently trading crypto derivatives, regulators will want to know exactly what volume is traded. Few banks are currently reporting their crypto derivatives trades, which is why the regulators currently have no way of getting hold of average daily volume data. This will eventually change, which is why those banks that start turning their attentions towards reporting crypto will be best placed for when the likes of the FCA come knocking.
As experienced from previous rules, it is important to build efficiencies into existing systems so that costs can be minimised from the start. One way of doing this is to capitalise on huge advancements in tech that allow automation and outsourcing whenever it comes to having to report crypto derivatives. Banks currently immersed in the market can at least lean on experiences gleaned from the reporting of more conventional OTC derivative contracts under the European Market Infrastructure Regulation (EMIR).
The costs around EMIR transaction reporting involved firstly determining your reporting obligations, which then required allocation of internal resources and engagement of external consultants to analyse the application of the regulations. Now this is not to say that the regulation of crypto derivatives will be a carbon copy of the entire EMIR obligations but the reporting obligations of EMIR now seem to apply to all Crypto currency derivatives since they have previously been subject to product intervention measures in 2018.
That said, given the fact that banks trade crypto futures and options globally, they could potentially be subject to multiple reporting regimes across numerous jurisdictions – similar to EMIR. The question is not if, but when the reporting of crypto derivatives starts being enforced. Once a consensus has been reached on regulating real-world crypto assets, then the derivatives regulators around the world will not be far behind. Assuming a regulatory consensus is reached, the mandatory reporting of crypto derivatives could be something than banks need to focus on next year.
After all, as recent history has shown, anything that is traded to any scale eventually needs to be reported on.
Even though there is still some level of confusion, most firms offering Crypto derivatives think it’s best to be on the front foot by reporting them now and therefore not have to focus on backloading once ESMA or the FCA clarifies the issue.