The sale and promotion of derivatives of bitcoin and other cryptocurrencies to amateur investors is being banned in the UK by the financial regulator, the Financial Conduct Authority (FCA).
It is a further blow to the burgeoning cryptocurrency market, coming soon after the US authorities indicted the owners of leading crypto derivatives exchange BitMEX for operating without being US-registered and allegedly failing to follow anti-money-laundering rules.
In view of recent findings from the University of Cambridge that most firms involved in crypto investments are still operating without a license, other operators are potentially vulnerable to indictments too.
It all sounds like bad news for anyone hoping that more investors will put money into cryptocurrencies. But on a closer inspection, I’m not so sure.
Drops and oceans?
The FCA is preventing retail investors from buying and selling the likes of cryptocurrency futures and options, which people often use as a way of hedging their bets on an underlying asset. For example, you might buy an option to sell a certain number of bitcoin at today’s price if the price falls by 10%, giving you an insurance policy in case the market moves against you.
The FCA said it was introducing the ban from January 6 because amateur investors were at risk of “sudden and unexpected losses”. The reasoning is that these people often don’t understand the market, there is lots of “market abuse and financial crime” in the sector, cryptocurrencies are very volatile and they are hard to value.
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 thinking “it may be the currency of the future”, having “heard sensational news coverage about the rise and fall”. There are any number of splashy trading sites offering them quick and easy entry into this world, and YouTube influencers who enthusiastically encourage them to try complex trading.
Some 1.9 million people – around 4% of the adult population – own cryptocurrencies in the UK. Three-quarters have holdings worth less than GBP 1,000 (USD 1,305) and would certainly qualify as retail investors. We don’t know what proportion of UK investors use crypto derivatives, but we do know that the worldwide trade in these financial products was nearly a fifth of the total crypto market in 2019 (and has been growing rapidly in 2020).
Yet retail investors are probably not the main users of derivatives. Trading site eToro said earlier this year that maybe only a tenth of their retail investor spend was on this segment. And with most of the UK contingent using non-UK based exchanges, it’s easy enough to avoid FCA jurisdiction. The FCA says the ban could reduce annual losses and fees to investors by between GBP 19m and GBP 101m.
The ban also doesn’t make much difference at a worldwide level. The UK crypto market is small beer compared to global cryptocurrency holdings, which are worth around USD 400bn. You would not, therefore, have expected the FCA ban to have a material detrimental impact on the price of bitcoin or leading alternative coins like ethereum, and sure enough, it didn’t. In fact, it was widely expected by industry observers and had arguably already been priced in.
Read more: The Conversation