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FCA Bans Retail Crypto Derivatives Offerings Across the U.K.

October 7, 2020 by Blockchain Consultants

There have been significant concerns in the United Kingdom over a possible ban on crypto-based derivatives for about a year. While it seemed like the government had given up on its ban aspirations, all hope appears dashed as it is now set to move forward with planned action.

Not Suitable for Retail Investors

Earlier this week, the British Financial Conduct Authority (FCA) announced in a press release that it would be banning the sale of crypto-based derivatives to retail customers. As the press release explained, the agency had conducted a consultation over their utility for retail customers, and it found that they were ill-suited for these investors. 

The FCA provides several reasons for its ban, including crypto derivatives having no reliable valuation basis. The agency also highlighted its susceptibility to criminal activity and their price volatility. The agency also pointed out that retail consumers have an inadequate understanding of these derivatives, adding that they don’t have a legitimate need for such products. 

As the release confirms, the ban will begin on January 6, 2021. The agency will classify any firms that trade in these derivatives as a fraudulent organization.

The prospect of banning crypto derivatives is one that the FCA has been toying with for the past two years. Back in 2018, a report from the U.K.’s Cryptoasset Task Force called for the ban of these derivatives, highlighting that exchange-traded notes (ETNs) and contracts for difference (CFD) were particularly dangerous for retail investors. 

At the time, the task force explained that it had gotten several complaints about these tools and their potential for harming retail investors with little understanding of what they were. To simultaneously ensure innovation in the space and consumer protection, a ban on retail trade for these financial products would be prudent. 

What Happens Now?

Last July, the FCA first proposed its derivatives ban, explaining in a document that it planned to follow up on the task force’s recommendations. In aa separate policy document explaining how the ban could work, this ban could save investors between 267 million pounds ($338 million) to as much as 451 million pounds ($570 million) every year. 

While some hoped that the government could step in to provide help, all hopes were apparently dashed when Economic Secretary to the Treasury John Glen confirmed that the FCA would have the final say on the matter. 

Now that the FCA has banned crypto derivatives trade, it’s only a question of what part of the industry it would choose to attack next. The FCA already published a release proposing that crypto exchanges and asset custodians be placed under annual financial crime reporting obligations. In its document, the agency explained that the information that these companies provide would help promote a data-led supervisory approach for the industry. 

At the same time, such obligations could hamper these companies’ operations significantly. If history is anything to go by, it could even lead to an exodus of crypto firms if it happens. Suddenly, the U.K. looks grimmer than even the U.S. for crypto firms.

FCA Bans Retail Crypto Derivatives Offerings Across the U.K.

Source

Filed Under: blockchain, cryptocurrency Tagged With: CFD, Companies, crime, crypto, cryptocurrency, derivatives, Exchanges, exodus, FCA, Go, government, information, Regulation, Space, u.s., uk, United Kingdom

UK FCA derivatives ban signals disapproval of crypto as a whole, CoinShares exec says

October 6, 2020 by Blockchain Consultants

Following the definitive ban of cryptocurrency derivatives in the United Kingdom, cryptocurrency companies in the country shared their thoughts on the matter with Cointelegraph.

Among the most affected is CoinShares, a U.K. company known for providing cryptocurrency exchange-traded notes, or ETNs. Unlike exchange-traded funds, ETNs do not necessarily own the underlying asset and are instead a way of tracking the returns of a particular index. When they mature, holders pay or receive the difference between the initial purchase price and the return of the underlying index.

Crypto ETNs fell under Tuesday’s broad ban by the Financial Conduct Authority, along with products like crypto futures, options, CFDs and other derivatives.

The regulators’ stated concern involves the risks that such products pose, especially since their derivative nature makes it possible to open highly risky leveraged positions. The ban does not impact direct crypto trading in any way, which remains open to retail investors and often features leverage as well, albeit with milder amplification.

However, CoinShares ETNs are completely unleveraged, or “delta 1x” in financial terms, meaning that they track the underlying prices one-to-one. Townsend Lansing, head of product at CoinShares, expressed his disappointment in the decision in a conversation with Cointelegraph:

“We are extremely disappointed by the FCA’s decision to include delta 1 ETNs in its ban on distribution of crypto derivatives to retail investors in the UK. We and many other industry participants put forward a number of reasons why such a ban would be ill-advised and would not benefit retail investors. Unfortunately, the FCA ignored those reasons, or dismissed them with little additional information.”

According to Lansing, the ban will have the opposite intended effect, as it will “simply drive UK retail investors to unregulated crypto exchanges.” He claimed that even the FCA believes these have “far fewer protections than the regulated ETNs offered by CoinShares and other providers.”

It is curious that the FCA’s ban affected a product that is arguably safer and more regulated than directly buying cryptocurrencies.

Danny Scott, CEO and Co-Founder of U.K. crypto exchange CoinCorner, told Cointelegraph that the FCA is “comfortable with [crypto] assets and seemingly have a pro stance, they’re just not comfortable with companies packaging them up in traditional trader focused products that the everyday person doesn’t understand.”

Scott added that in the company’s understanding, “this doesn’t affect Bitcoin exchanges like ourselves, but it will affect companies such as Revolut and eToro that offer a CFD rather than the asset itself.”

Lansing was nevertheless much more negative about the regulator’s efforts. “The FCA made it clear in their initial consultation and in the draft rules: they do not believe digital assets such as Bitcoin have value and therefore, they believe they are fundamentally unsuitable for investment.”

He suggested that the FCA’s retail crypto trading ban extends to the “limit of their regulatory perimeter,” which could explain why it includes ETNs despite their seemingly lower risk profile.

Nonetheless, the FCA’s previous efforts were primarily centered around upping the standard of regulatory compliance in crypto to that of the traditional finance sector. A heavy handed ban appears to be out of character for the agency, which could have opted for more nuanced restrictions to derivatives trading — for example limiting maximum leverage.

When asked if CoinShares expected the decision, Lansing replied:

“We were extensively involved in the FCA consultation process and had several meetings with the FCA in an attempt to dissuade them from banning ETNs. As a result, we could see first hand the FCA’s disapproval of the digital asset class. So, to that extent, we knew there was a meaningful probability that the FCA would enact the ban as proposed.”

He nevertheless reassured that the company is sufficiently diversified to withstand such a blow.

UK FCA derivatives ban signals disapproval of crypto as a whole, CoinShares exec says

Source

Filed Under: blockchain technology Tagged With: Bitcoin, ceo, CFD, Co-founder, Companies, crypto, Crypto Ban, crypto exchange, Cryptocurrencies, cryptocurrency, derivatives, etoro, exchange, Exchanges, FCA, finance, head, index, information, investment, other, Revolut, Trading, uk, United Kingdom

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