How Mettalex Differs From Your Typical Crypto Derivatives Exchange

Oct 9, 2020

On Wednesday, The U.K.’s Financial Conduct Authority (FCA) announced the ban of cryptocurrency derivatives products to retail investors. This came as a consequence to customers accumulating an average of £53 million ($68.9 million) in financial losses each year.

According to The Authority, derivatives based on cryptocurrencies such as bitcoin (BTC) or more recently, popular alt-coins, are “ill-suited for retail consumers due to the harm they pose.” Risks outlined by the governing party included a lack of “reliable basis for valuation” for the underlying asset, “extreme” price volatility, and market manipulation.

As a company that is gearing up to launch the first of its kind commodities derivatives exchange, Mettalex, which utilizes commodities as a base asset for trading, we thought now would be a good time to address the differences between commodities derivatives and cryptocurrency derivatives.

As reported, The FCA considers cryptocurrency derivatives to be ill-suited for retail consumers due to the harm they pose due to specific financial features. According to the FCA, “these features mean retail consumers might suffer harm from sudden and unexpected losses if they invest in said products”. It proposed that these products cannot be reliably valued by retail consumers because of the:

  • inherent nature of the underlying assets, meaning they have no reliable basis for valuation.
  • prevalence of market abuse and financial crime in the secondary market (eg cyber theft).
  • extreme volatility associated with crypto asset price movements.
  • lack of legitimate investment need for retail consumers to invest in these products.

While we may or may not agree with the views of the FCA, we are building a product that solves the pain points associated with its derivatives ban.

Mettalex is a decentralized and tokenized commodities derivatives trading platform powered by Fetch.ai and developed with the mission to bring the $2.5 trillion commodities market on-chain.

Mettalex features a decentralized exchange that allows traders to take long and short positions against a range of reference assets and commodities, using a tokenization layer that represents commodities on-chain, a liquidity provision layer that allows for autonomous market making, and a governance layer that enables decentralized governance.

Our view is that Mettalex falls outside of the FCA regulatory perimeter as in the Mettalex DEX, it is the commodities themselves that are translated into digital assets, rather than enabling derivatives of crypto-assets themselves.

Taking each of the FCA’s points in turn, on Mettalex:

Reliable basis for valuation

  • traders are presented with reliable indices providing valuation for the commodities listed, denominated in either fiat/stablecoin.

Prevalence of cyber crime, market abuse and financial crime

  • While cyber security is a significant risk, we share this challenge with the existing financial system. As it relates to the derivatives themselves, position tokens have no value outside of the protocol.

Extreme crypto-asset price volatility

  • Mettalex is focused on enabling the hedging of commodity prices. The commodities that will be traded are not hugely volatile.

Lack of legitimate need for retail investors to invest

  • As in the traditional commodities industry, hedging via short and long positions, enables market stability, and has genuine utility for physical market participants. An efficient market is one driven by a large number of economic agents who collectively make effective predictions of future price. In this context, Position Tokens are a risk management tool as opposed to a risk.

No one can predict what’s to come in terms of future regulation. Nonetheless, we are excited to bring a product to market that optimizes decentralized liquidity and encourages cross-asset trading of commodities without the need for a counterparty.

We are in regular dialogue with legal advisors and the regulator and look forward to launching the Mettalex trading platform very soon.