"The point is simple: as a European retail user, you do not have the right to access crypto derivatives," says Morgane Fournel Reicher, a lawyer at Herbert Smith Freehills in Paris.

Popular on exchange platforms such as Binance, Bybit or Deribit, crypto futures have been on the radar of global regulators for several years now, particularly in Europe.

Yet these products are essential for investors. They enable investors to protect themselves against market fluctuations and develop more sophisticated trading strategies. "A platform that doesn't offer them is practically disqualified," independent trader Karl Chappé-Gatien, known by the pseudonym "High Stakes Capital", tells The Big Whale.

According to aggregated data by CCData, derivatives accounted for more than 70% of total trading volume on centralised platforms in September. Un marché lucratif, donc.

European AMF settles legal debate

For years, the crypto derivatives market has operated in a legal grey area. However, regulators have finally settled the debate, particularly in Europe.

In 2018, the Autorité des marchés financiers (AMF) published a legal position, updated in 2021, classifying crypto derivatives as financial products. This decision made them subject to European MiFID II regulations, one of the strictest in finance in Europe. The ESMA, the European Securities and Markets Authority, subsequently officially adopted this position.

Morgane Fournel Reicher explains, "As soon as a contract incorporates the notion of a term and a cash settlement, a category in which the AMF has decided to place cryptocurrencies or stablecoins, it is considered a derivative."

To date, no crypto platform holds the requisite licence. Unsurprisingly, traditional players seem to be better positioned in this market. For example, SG-Forge, the Société Générale Group's crypto subsidiary, already issues a euro stablecoin, EURCV, and holds a MiFID II licence.

Morgane Fournel Reicher continues: "MiFID II, like all European regulation, creates an intermediated market that only sophisticated investors can access, whereas the very purpose of crypto platforms is to remove this intermediation. For example, the derivatives offered by crypto platforms are accessible in the same way as their spot products. However, the main concern of European regulators is investor protection."

She regrets that the position of the AMF and more generally that of European regulators is content to "copy" existing financial regulations to the crypto world, regulations which, without work to adapt them, are nonetheless ill-suited to its development.

While this decision could put the brakes on innovation if other regions of the world are more flexible, Europe is not alone in hardening its tone. In 2021, BitMEX, the pioneering crypto derivatives platform co-founded by Arthur Hayes, agreed to pay a $100 million fine to settle its dispute with the CFTC (Commodity Futures Trading Commission). The US derivatives regulator accused it of failing to register this activity.

Sébastien Praicheux, partner at Norton Rose Fulbright, says: "Regulators are seeking to align the structure of exchange platforms with that of financial institutions. For each activity, such as derivatives, they will have to obtain a range of licences". He adds that ESMA should reposition itself on the subject in the coming weeks.

Binance's (for now) aborted attempt

When it registered as a digital asset service provider (DASP) in May 2022, Binance was forced by the AMF to stop offering its futures to its users. "It was more or less a kind of agreement with the regulator," confides a source close to the company.

A few months later, Binance submitted an application to obtain an investment services provider (ISP) licence in order to comply with MiFID II. Unfortunately, the process has been at a standstill since the summer of 2023, due to the legal cases targeting the platform in the United States.

Read also - Binance is actively working to bring futures back to France

In the package presented to the French regulator, Binance had created a subsidiary called "Binance Futures", respecting the rules of independence from the French subsidiary. "The idea was to adopt the standards of traditional finance in order to continue offering derivatives to retail users, but above all to attract crypto and traditional institutional investors", explains this source. He adds with regret, "If it hadn't been for its legal cases, Binance would have ended up with this licence. Everything was ready to go."

To date, it is its rival Coinbase that seems best positioned. Although little expected in this field, the American platform announced in January that it was in advanced negotiations to acquire a company based in Cyprus. This acquisition would enable it to offer crypto derivatives to its customers in Europe.

A grey area that benefits certain players

In the meantime, European regulators are trying to enforce the law, with mixed results. The most striking example is Bybit, blacklisted by the AMF since 20 May 2022. This summer, the platform, founded by Chinese entrepreneur Ben Zhou, officially announced the cessation of its services on the French market.

"If you declare that you are of French nationality during KYC, you are simply refused access to the platform. They are very strict on this point," explains a French trader who used to use this platform for crypto derivatives.

However, some platforms such as BitMEX or Bitget remain accessible to French clients, despite not even having PSAN registration - the regulatory minimum for offering services on crypto-assets. BitMEX did not hesitate to attract Bybit users after the announcement of its closure to French customers.

"Really bad luck what is happening on Bybit... What if there was an exchange not on the AMF blacklist, OG since 2014, and which accepts French speakers. Up to $5,000 deposits for new (re)arrivals!", had tweeted on August 2 in French the BitMEX account. This message was clearly tantamount to commercial inducement, a privilege normally reserved for players at least registered with the AMF. The platform even had a stand at Surfin Bitcoin, the conference dedicated to Bitcoin held in Biarritz at the end of August.

Remember that a platform is not required to be registered with the regulator or to hold a licence if it does not explicitly target users in a particular jurisdiction. If users invest unsolicited, the platform benefits from reverse solicitation.

"Nevertheless, it is difficult to consider that regulation is open to this practice, as evidenced by the experience of investment services, particularly derivative products," adds Sébastien Praicheux.

Decentralised exchange platforms spared?

With the KYC requirement and the need for regulators to identify and block VPNs, centralised exchange platforms are being forced to drastically restrict access to these products in certain regions, particularly in the US and Europe. Bybit and Binance are the most recent examples.

In this context, decentralised exchange platforms such as dYdX, Hyperliquid or GMX are emerging as promising alternatives. Currently, they require no KYC, allowing users to access them simply by connecting their non-hosted portfolio, thus retaining control of their funds.

"Centralised exchange platforms are struggling to obtain regulatory licences, particularly in Europe. In fact, we believe that the future of long-term trading lies on-chain", explained Charles d'Haussy, chairman of the dydX foundation, in an interview.

"However, these platforms still have significant limitations in terms of liquidity and the ability to manage large volumes. Their latency time is also less efficient than that of centralised platforms", qualified one trader.

However, regulation could also catch up with these players. "As with decentralised finance (DeFi), regulators will inevitably seek to regulate the derivatives of decentralised players. It will be interesting to see what legal definitions they assign to decentralisation," warns Morgane Fournel Reicher.