The UK’s Financial Conduct Authority proposes ban on any financial assets that are based on cryptoassets or cryptocurrencies. This came on the heels of a recent approval to set up a hedge fund based on cryptocurrencies.
The FCA is not banning cryptocurrencies, it is merely banning any derivative financial instruments that are linked to cryptocurrencies. This decision was taken in order to protect retail customers of such derivatives from extreme fluctuations that are common with cryptocurrencies.
In a press release on 3rd July 2019 then FCA outlined the reasons for the ban proposal –
The FCA considers these products are ill-suited to retail consumers who cannot reliably assess the value and risks of derivatives or ETNs that reference certain cryptoassets (crypto-derivatives). This is due to:
- inherent nature of the underlying assets, which have no reliable basis for valuation
- the prevalence of market abuse and financial crime in the secondary market for cryptoassets (eg cyber theft)
- extreme volatility in cryptoasset prices movements, and
- inadequate understanding by retail consumers of cryptoassets and the lack of a clear investment need for investment products referencing them
The cryptocurrency market has been expanding to include a host of new “altcoins” that are slowly moving up the market in terms of value. However, the market is riddled with fluctuations. Investors usually prefer a fluctuating market as it provides high returns even though that includes a higher risk. However, for the retail customer of derivatives or funds based on derivatives, there is a greater chance of loss. This is compounded by an ignorance of the cryptocurrency market and the technology that it is based on. According to the FCA, this could lead to significant confusion and loss among retail customers.
The FCA is therefore consulting on banning the sale, marketing and distribution to all retail consumers of all derivatives (ie contract for difference – CFDs, options and futures) and ETNs that reference unregulated transferable cryptoassets by firms acting in, or from, the UK.
Press Release, FCA
The FCA believes that this proposal would be inline with its commitment in the UK Cryptoasset Taskforce Final Report. It is meant to protect the retail and local economies from the dangers posed by cryptocurrencies. This is the main bone of contention that is currently being explored by multiple countries with regard to the Facebook Libra cryptocurrency. The potential ban could save the retail consumers from a loss of a range starting from £75 million to £234.3 million a year.
Christopher Woolard, Executive Director of Strategy & Competition at the FCA, said:
‘As with our work on the wider CFD and binary options markets, we will act when we see poor products being sold to retail consumers. These are complex contracts built on top of complex assets.
Most consumers cannot reliably value derivatives based on unregulated cryptoassets. Prices are extremely volatile and as we have seen globally, financial crime in cryptoasset markets can lead to sudden and unexpected losses. It is therefore clear to us that these derivatives and exchange traded notes are unsuitable investments for retail consumers.’
This proposal followed the earlier warnings by the FCA to general consumers about the risks associated with direct and indirect investments in cryptoassets.