Britain’s FCA pushing crypto derivative ban, but exchange group opposes

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Updated: 08 October 2019

The UK’s financial watchdog, the Financial Conduct Authority (FCA), has slipped into a higher gear, when it comes to protecting consumer interests. After the binary option debacle, where consumers lost billions to an industry gone badly, the FCA has become more strident in its attempts to corral “bad actors”. In many respects, it has followed ESMA’s edicts in the EU to ban binary options, put restrictions on CFDs, and revamp to way brokers market to and acquire new customers. It now feels that cryptos, more specifically crypto derivatives, present a clear and present danger to the public.

After concluding what it terms a “consultation period on crypto asset derivatives products”, whereby it fielded public comments on intended legislative changes, it has come out punching away to protect punters from themselves. It is presently mulling a ban of crypto derivatives that would go into effect in 2020, claiming they are, in a word, “dangerous”.

There is more evidence to support their thinking, but the agency appears to be taking a “ready-fire-aim” approach. The Economist noted in one article that: “British traders lost almost half a billion dollars on crypto derivatives between the middle of 2017 and the end of 2018.” The FCA announcement that accompanied the original notification of the consultation period had mentioned that by limited these instruments to “accredited investors”, the FCA could reduce this loss figure by $290 million.

The Economist also explained that the regulator was concerned with “leverage of up to 100x, high trading fees, potential market manipulation, illiquidity, and difficulty in valuing digital assets”. The FCA had independently determined that there seemed to be a high correlation of casualty rates between questionable investment mediums, including binary options, CFDs, and crypto derivatives, which it interpreted as meaning their usage was driven by marketing hype, rather than by the technology used or its applications.

Other regulatory agencies, especially the other major ones, have not been this outspoken to date, choosing rather to observe innovations as they evolve, instead of stepping in to squelch then in their early stages. Jacqui Hatfield of the law firm Orrick told reporters at NewsBTC that the proposed restrictions endorsed by the FCA were a “knee-jerk reaction” and that would drive investors to take on more risk by taking larger positions or dealing with offshore exchanges or brokers that would be immune to the new rules.

Danny Masters, the chairman of UK-based digital asset management firm Coinshares, also argued that the FCA is overstepping its mandate: “We believe that the FCA has not provided sufficient evidence to justify the proposed ban. Through its consultation, the regulator makes little attempt to genuinely evidence its claims and instead ‘cherry picks’ datasets in order to illustrate its perception of cryptoassets, ETNs and the perceived harm the FCA believes these products cause.”

Will the FCA take note of these objections? Maybe yes, maybe no, but the issue took a new turn when the World Federation of Exchanges (WFE) stepped into the fray. This group is no mere gathering of small-time players. The trade group is comprised of some of the world’s leading exchanges, including the CME, Nasdaq, and the Intercontinental Exchange, the owner and operator of both the New York Stock Exchange and the new Bakkt crypto futures exchange.

The WFE published an announcement, which, according to CryptoGlobe, urged the FCA “not to ban cryptocurrency derivatives as it needs to find a balance between enabling innovative products to be traded on the market and ensuring these are safely traded by regulated providers”.

Nandini Sukumar, the CEO of the WFE, was quoted as stating: “We ask that authorities, including the FCA, chart the right regulatory course to allow the market to flourish and benefit its consumers even as we understand that it’s a balancing act.”

The WFE contends that crypto exchange platforms are well equipped to protect consumers and that banning these derivatives is not the right course at this time. It appreciates that these instruments tend to be very volatile and that the FCA should be concerned that proper consumer protections are in place, but it should not ban them. If it does, it should also propose review periods to determine if the ban was premature.

Observers of the UK crypto arena are also concerned that the FCA has been increasing its inquiries into companies in the cryptocurrency space. A recent report from the Financial Times states that the FCA has conducted 87 inquiries into crypto-related entities, a 74% increase since last October.