UK crypto derivatives ban fails to protect retail investors


The valuation of cryptocurrencies has increased dramatically over the past 12 months, as has their adoption by investors around the world – individuals and institutions.

Until a few years ago, most retail investors would have needed to hire a broker or investment professional to manage their investments. Today, consumers are flocking to apps and platforms that allow them to make direct investments themselves, without a middleman, both in traditional financial assets – and increasingly in crypto.

A sign of the accessibility of digital assets even to retail buyers, US regulators last month cleared the country’s first crypto-derivative ETF, for bitcoin, the most popular digital currency. In giving permission, officials followed their counterparts in jurisdictions as diverse as Canada, Germany, Dubai and Brazil.

And where is the UK in all of this? The answer is lagging behind. Far from preparing to join the global campaign to give retail investors proper access to crypto products under the security umbrella of tight regulation, the Financial Conduct Authority is sticking to a ban it introduced last January, banning the sale of crypto derivatives to retail clients.

This must change. The restrictions don’t really work because investors can still buy these derivatives overseas, or through roundabout channels beyond the control of regulators. Far from strengthening investor protection, the measures risk compromising it.

Instead of strengthening Britain’s position as a global financial center, an overly cautious approach to crypto limits the UK’s ability to develop a share of this revolutionary, fast-growing market.

Certainly, the FCA is right to focus on investor protection and fear that such a rapidly developing market poses dangers for investors. But it must adapt its muscular approach to a more flexible policy that can still offer investors the required level of security.

Post-Brexit, the UK is strategically positioned to take a proactive stance on adopting retail crypto, but has instead taken a ‘wait and see’ approach and has consistently raised concerns about protecting consumers. consumers, which has at times been inconsistent with its own research.

UK Financial Conduct Authority (FCA) published a poll this year, noting that the majority of crypto asset owners are generally familiar with the product, are aware of the lack of regulatory protection, and understand the risk of price volatility.

However, when the FCA announced in January its ban on the sale of crypto derivatives to retail clients, it said that “retail consumers cannot reliably assess the value and risks of derivatives such as contracts on difference (CFDs), futures, options and traded exchanges. notes (ETN) which refer to certain crypto-assets ”. FCA’s reasons included concerns that consumers lacked a “reliable basis for valuation” and that retail clients had “an inadequate understanding and lack of clear investment need”.

There is an obvious contradiction here between this claim and the FCA’s own investigation.

The regulator’s move was widely viewed by industry – which advocated a more balanced approach involving protective measures such as capping leverage – as unnecessarily prudent. It is difficult to understand who this move protected, given that UK clients are still able to open offshore accounts that offer derivative transactions with up to 100 times the leverage.

I believe most do it with their eyes open. Retail investors entering the complex world of crypto and digital assets are required to ‘do their research’. And many do.

FCA’s derivative ban seems oddly out of step with the UK’s historic success as a fintech hub and the government’s commitment to be a competitive and innovative jurisdiction for financial services. Even in the EU, often seen in Britain as a bureaucratic monster slow to keep pace with financial pioneers, there are no similar prohibitions. Neither in the United States nor in most of Asia.

The decision by US officials last week only underscores how isolated Britain is at risk of becoming. In fact, the United States Commodity Futures Trading Commission has overseen the regulated crypto derivatives markets for almost three years with products that provide a reliable basis for valuation. These markets are accessible to individuals as well as to professional investors.

In a welcome development, the UK government has consulted on the proposals to bring the promotion of certain types of crypto assets within the scope of existing rules – in an apparent effort to increase information flow and transparency.

The regulator also recently launched a new “InvestSmart” campaign, aimed at helping consumers make more informed investment decisions and raising awareness of risks, especially for young crypto investors.

The FCA is also studying the possible inclusion of crypto assets in the “Category “High risk investment” available to the richest and well-advised investors. This includes other assets such as non-realizable securities, peer-to-peer deals and illiquid speculative securities.

CryptoUK works closely with the FCA and supports initiatives designed to educate consumers to assess risk and highlight investment nuances specific to crypto.

However, there is a fair balance between protecting vulnerable people while recognizing the growing demand for regulated crypto products from knowledgeable retail investors.

Even with regulatory barriers, UK retail clients’ appetite for crypto continues to grow. The FCA estimates that the number of consumers holding cryptocurrencies rose to 2.3 million in the 12 months leading up to June 2021 – from 3.9% to 4.4% of adults in the UK.

We should find a regulatory balance for crypto investing that adequately mitigates risk, but does not stifle the many societal benefits that crypto can bring to retail investors, including the potential to build considerable wealth.

Ian Taylor is Director of Crypto UK, an industry association

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