Ban risky investments like cryptocurrency derivatives: Dutch regulator

The Dutch regulator on financial markets AFM wants to ban risky investments that are increasingly being marketed online, often from abroad. She notes that cryptocurrencies like Bitcoin are quite risky to begin with, let alone the blurring of the lines between investment and gambling seen with cryptocurrency derivatives that allow an investor to stake money against a prediction that the value of Bitcoin will rise or fall. The new directives are part of the AFM's plans for 2018, which will be presented on Wednesday, Merel van Vroonhoven, CEO of AFM, said in an interview with the Volkskrant.

According to Van Vroonhoven, providers of risky investments online like to play on the fear of missing out. The regulator previously cautioned against investing in cryptocurrencies like those created in initial coin offerings (ICO), but Van Vroonhoven's statement signals a stricter approach towards cryptocurrencies than the AFM suggested in the past when it also acknowledged the technology's potential to make it easier for legitimate businesses to raise financing.

"I think the ICO mechanism is fairly promising and can contribute to a more efficient use of capital markets", Lars van de Ven of the FinTech team at AFM said to NL Times last November. While concerned about ICOs as a flash-in-the-pan, Van de Ven told a conference of cryptocurrency and ICO enthusiasts about the need for them to self-regulate to prevent authorities from getting involved. "If we see too many scams, regulators will be forced to step in and will kill it," he stated.

The AFM can do little against cryptocurrencies themselves, because most do not fall under the AFM's mandate to regulate investment products. But there are products that allow consumers to speculate on price rises and falls in cryptocurrencies, and these can soon be banned, Van Vroonhoven said to the newspaper.

"Because of the extremely low savings rate, people have become more sensitive to investments which are fenced with high returns. They underestimate the risks", Van Vroonhoven said. Cryptocurrency is a particular concern. At least 135 thousand Dutch already invest in cryptocurrency, double that of a year ago. Another 150 thousand Dutch are considering buying crypto coins. "That was shown in a study in October. Assume that this number has increased."

This also applies to other products offered online, such as binary options - in which an investor, for example, bets on whether Shell share prices will rise or fall. If he gambles well, he gets a high return. If not, he loses all of the money he bet. Because the profit is relatively lower than the loss, investors who buy binary options almost always lose. "74 to 89 percent of consumers lose money with these investments, according to research", Van Vroonhoven said. Binary options are often compared to playing roulette in a casino.

Investors' association VEB, which is generally against measures that limit investors' possibilities, is also critical of these products. "It all seems very nice, but for most investors this really is too risky", director Paul Koster said to the Volkskrant.

The Finance Ministers of France and Germany are currently working together on cryptocurrency regulations, which they plan to present at the G20 summit in Argentina in March. Dutch Finance Minister Wopke Hoekstra said he looks forward to seeing what these regulations entail, and will then decide what to do in the Netherlands.