Updated: Nov 19, 2020
With a strong decision post Brexit and moving in a different direction to the European regulator ESMA, the FCA has banned cryptocurrency CFDs to retail traders.
The announcement on the 6th October by the UK regulator moves to ban the promotion and marketing of, or sale to retail clients, of derivatives based on cryptocurrencies.
Retail traders, often referred to as individual traders, buy or sell securities for personal accounts.
The FCA just does not like Crypto-currencies and the potential fraud associated with them. Mainly due to the scope for market abuse, as well as extreme volatility in price movements, the Financial Conduct Authority (FCA) has deemed products linked with cryptocurrencies ill-suited for retail consumers due to the harm they may pose.
The ban not only includes OTC derivatives such as CFDs, or Contracts for Difference, and Spread betting, but it also extends to exchange-traded products including ETNs, Futures and Options.
The potential harm to retail traders associated with Crypto’s was highlighted last year when ESMA restricted the leverage available to retail traders on cryptocurrencies capping that a maximum of 2:1.
ESMA is an independent EU Authority that contributes to safeguarding the stability of the European Union's financial system by enhancing the protection of investors and promoting stable and orderly financial markets.
However, the FCA clearly believes that those restrictions did not go far enough.
The FCA estimates that retail consumers will save around £53m from the ban on these products. I would not like to guess how much has been lost to date.
Sheldon Mills, interim Executive Director of Strategy & Competition at the FCA, said: ‘This ban reflects how seriously we view the potential harm to retail consumers in these products. Consumer protection is paramount here.
‘Significant price volatility, combined with the inherent difficulties of valuing crypto assets reliably, places retail consumers at a high risk of suffering losses from trading crypto-derivatives. We have evidence of this happening on a significant scale. The ban provides an appropriate level of protection.’
To stress, the ban is not being extended to professional traders or institutional firms like hedge funds, which have typically been allowed access to riskier financial products than the general population. It is about protecting people who might have been drawn to bitcoin having been told sensational stories and unsolicited campaigns on Facebook, Instagram etc. how to make money fast. There are numerous trading sites offering people a quick inexpensive and easy entry into the crypto market and a growing number of YouTube influencers who enthusiastically encourage them to try complex trading to benefit their own pockets, obviously.
Although the UK is a fraction of the global trading market, this decision will have ramifications for other regulators as a growing number of complaints are lodged. Some illicit companies offer investment via Crypto wallets, often this transaction is unlawful and the investors waves goodbye to his/her capital.
Block chain technology is here to stay as are the established crypto currencies such as Bitcoin, what the FCA are doing is trying to protect the general consumer who may not fully understand the risks & complexity of online trading.
Many analysts predict that all that crypto needs is a verified exchange traded fund (ETF) to legitimise and find institutional support and investment.
ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold throughout the day on stock exchanges.
Moreover, there is a growing possibility that crypto will be floated on the Nasdaq, which would further add credibility to blockchain and its uses as an alternative to conventional currencies. Financial institutions will want to try to regulate all Crypto currencies, the battle will be long as investment in them grows.
Read FCA statement in full.