- The advantages are numerous and varied, including those that actually reduce risk. Consider that derivative trading necessitates the use of arbitrage, which is required to ensure that asset valuations are accurate.
- Derivatives are also used by many to mitigate the risks of shifting particular asset prices. Investors can also use derivatives to transfer risk to third parties.
- Because of the minimal transaction fees, retail investors might save a lot of money. When comparing the fees connected with derivatives to those involved with spot trading, the former has a major advantage. Many
Recently, Paul-Willem van Gerwen, the Dutch Authority for Financial Markets’ head of capital markets and transparency oversight, emphasized the hazards of bitcoin derivative trading, stating that such transactions should be limited to the wholesale market. Van Gerwen stated that these dangers – such as the potential for market manipulation and criminal conduct – demonstrated why the Netherlands should follow the United Kingdom in restricting retail access to digital asset options and futures.
Advantages Of Crypto Derivatives
Van Gerwen said in a speech afterward on AFM’s website, I believe that crypto derivatives should only be traded on a wholesale basis. AFM thinks that, thanks to MiCA, it will be able to propose such limits on cryptocurrency markets (Markets in Crypto-Assets Regulation).
I believe van Gerwen is focusing on the incorrect focal point. Rather than focusing on the hazards, it is more prudent to consider the advantages of crypto derivatives. Once you grasp the advantages, there is a straightforward solution: regulate with the goal of mitigating the risks rather than outright prohibiting the activity.
In fact, the advantages are numerous and varied, including those that actually reduce risk. Consider that derivative trading necessitates the use of arbitrage, which is required to ensure that asset valuations are accurate. Derivatives are also used by many to mitigate the risks of shifting particular asset prices. Investors can also use derivatives to transfer risk to third parties.
Furthermore, because of the minimal transaction fees, retail investors might save a lot of money. When comparing the fees connected with derivatives to those involved with spot trading, the former has a major advantage. Many regulatory agencies have the difficulty of seeing what is – or, even worse, what has been – while failing to perceive what could be.
Is there a solution to the perplexing regulatory issue of crypto derivatives? Put the past behind us and concentrate on the future. It’s time for derivative exchanges to focus on developing a technology stack that may eliminate many of the hazards that have long been considered societally damaging. The time for action has arrived, and it is critical.
Exchanges should move to provide a platform that exceeds all regulatory expectations by utilizing high frequency trading and machine learning expertise. It should be able to connect the dots inside markets and between market participants using deep insights, providing surveillance and risk management throughout the trading process.
Extremely Valuable Instrument
Real-time notifications should be generated by a technology solution to regulatory issues, flagging bad actors’ attempts at market manipulation, abusive trading activity, and money laundering.
Such a solution should be capable of providing comprehensive analytics and reporting that complies with ESMA’s MiFID II (Markets in Financial Instruments Directive) II, the EU Market Abuse Regulation (MAR), the US Dodd-Frank SEC (Securities and Exchange Commission) regulation, and other global regulatory frameworks – including any additional requirements that regulators may deem necessary.
I believe that the solution is not to simply outlaw an extremely valuable instrument. Operational risk management, on the other hand, is the solution. If derivatives exchanges choose not to build the necessary technology infrastructure on their own, regulators may have an opportunity to step in and require it in the future.
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