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UK regulator FCA bans crypto derivatives for retail investors

Photo of: Sangeetha Golchha
by Sangeetha Golchha

The UK’s much-revered financial regulator has come forward and announced a ban on the sale of crypto derivatives to retail consumers. Its charge against it is that the underlying assets have absolutely no reliable basis for valuation. Derivatives are tradable securities or contracts that derive their value from an underlying asset. They usually include investment products such as contracts for differences, options, and futures. In the case of cryptocurrency derivatives, the underlying asset is usually Bitcoin, Ripple, Ether, or any other cryptocurrency. And now the ban has shaken the belief in the UK that these assets have inherent value or are trusted sources of value generators. 

The Financial Conduct Authority arrived at this critical decision after it consulted on the rules governing these financial instruments. The authority said that these products are “ill-suited for retail consumers due to the harm they pose”.

The financial watchdog specifically highlighted that the asset valuation is marred by volatility concerns. It has also left open the idea of market abuse and financial frauds including hacks and thefts. It stressed the fact that a great proportion of users do not have a proper understanding of the products which is an issue.

Sheldon Mills, the interim director of Strategy and competition at the FCA said; 

“The ban reflects how seriously we view the potential harm to retail consumers in these products”. He said there was evidence of retail consumers suffering losses “on a significant scale”.

As for the ban, it will get into effect on January 6th, 2021, and will save retail investors about 53 million pounds a year in losses and fees as per FCA estimates. People have not taken well the news of the ban and a great majority of them are opposing the ban. Many even went on to explain that these underlying assets are filed with value and retail consumers are perfectly well-versed with judging the value of the same.  

But FCA has maintained its stance and believes that they have no inherent value and prices are driven by speculation. In a recent survey conducted by the regulator, it was found that 47% of the users treated crypto assets as a gamble that could make or break them. More than one-fifth of the respondents acted on a fear of missing out. The survey results gave them the ground to argue that: 

“This shows that the majority of retail clients are not investing in crypto assets for a legitimate investment need.”

Retail Investment advocates welcomed the move with Anthony Morrow, Chief executive of financial advisory Open Money, highlighting that the products were not covered by the Financial services compensation scheme. 

“These products are complex, sophisticated investments that offer a real possibility of losing all your money very quickly,” he added.

Graham Bentley, managing director of investment marketing consultancy gbi2, believes that the word ‘market abuse’ holds important meaning. He said that the advertisements pertaining to crypto trading try to lure less-technical oriented users and it has really crossed the boundaries. 

CoinShares, a manager of digital assets sounded very disappointed,

“We find it difficult to see how the UK can be seen as welcoming of digital asset innovation when it is the only western jurisdiction to ban [these assets] based on an erroneous belief that they have ‘no intrinsic value’,” it said.