Does Belgian Bitcoin Derivative Ban Include CFDs?

The FSMA Decree pointed to risks related to investing in virtual currency, and that the layering of derivatives compounds their

Just over one year ago, Belgium’s Financial Markets and Services Authority (FSMA) issued a Royal Decree prohibiting the marketing of specific financial products deemed risky to investors.

Cited examples include products based on life insurance policies offering a payout upon death of an insured individual. The return received partially depends on when the insured dies, and “apart from the ethical aspects, these are complex and risky financial products ill-suited to retail clients.”

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Also singled out were “products that consist essentially of derivatives based on virtual currencies such as Bitcoin.” The Decree pointed to multiple risks related to investing in virtual currency directly, and explained that the leveraging effect of derivatives based on them compounds their riskiness.

What about CFDs?

It can be argued that contracts for difference (CFDs) based on digital currencies are a grey area. These contracts allow the investors to take positions reflecting the same profits/losses as if they were holding or shorting the actual underlying asset. They are often leveraged and charge a daily premium as a percentage of the position amount, regardless of its size (some CFDs reward the trader a daily premium for short positions on certain asset classes). Bid/ask spreads are higher than on venues where the underlying asset is traded. The contracts are also bound by an expiry date, at which the terms are finally settled.

At first glance, the FSMA’s provision should include crypto-based-CFDs. The market for “real” bitcoin derivatives is still in its fledgling stages, and is currently developing primarily in the US. The FSMA was therefore more likely referring to readily available products, such as CFDs.

Furthermore, the reasons supplied by the FSMA should be equally applicable to such products. Like traditional derivatives, CFDs are contracts whose value fluctuate according to that of their underlying assets. The inherent risk posed by their underlying assets, in this case bitcoin or litecoin, is preserved. Moreover, their potential for leveraging can translate into a similar volatility as traditional derivative products.

It should be pointed out however, that the provision does not explicitly prohibit the trading of actual bitcoins- even if leveraged, and even if to the same magnitude as offered by CFDs (e.g. 20:1, although no bitcoin exchange is known to offer this). One may question the rationale of the FSMA as to why it was so specific to mention only derivatives.

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Also, CFD products are purely synthetic; they don’t require a central facility for settlement or clearing. Their terms (e.g. periodic premium) also differentiate them from traditional derivatives. Such factors contribute to their degree of riskiness, and many jurisdictions require CFD providers to state the high level of risk in advertisements.

Another FSMA communication, dated from around the same period, indicates that the body does consider CFDs and binary options as derivatives and investment instruments. The communication seeks to cover what it terms “all types of derivative products”, with these classified as the over-the-counter (OTC) variety.

Action Taken

The FSMA edict was dated on April 24, 2014, communicated on May 21 and took effect July 1.

Numerous online brokers have however continued to offer bitcoin CFDs to Belgium-based customers. The FSMA has recently informed some brokers that their offerings do in fact contravene the Royal Decree. Enforcement measures such as fines have not yet been taken, perhaps in consideration of an unclear understanding of the regulations’ applicability.

One recent example is Markets.com, which alerted its third party affiliates to refrain from using marketing material for bitcoin-related products in Belgium. The firm also removed its French and Dutch language bitcoin-related advertising content. Members were informed that they should exercise caution to ensure that “nothing Bitcoin related is used in French or Dutch in Belgian sites.” Sources at Markets.com explained to Finance Magnates that action was taken following a warning by the FSMA.

Plus500 told Finance Magnates that it does not offer its bitcoin or litecoin CFDs in the country, citing the FSMA directive. Other brokers have also reported that they are removing availability of their bitcoin CFD offerings to Belgium-based clients.

Some smaller, lightly regulated brokers, however, have yet to remove their offerings.

Although we’re dealing with a niche product in a small market, the direction taken carries potential significance for the future. It can be particularly relevant in the EU, where in the absence of a specific ruling in one member state, direction is taken from another. A good recent example is Spain’s exemption of bitcoin purchases from VAT. The decision was drawn from a separate court ruling in the Netherlands, during which it was derived that bitcoin falls into the category of payment instruments exempt from VAT.

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