FCA Ban on crypto-assets: A step forward?

Khadra Mohamed explores the FCA’s ban on the retail sale of crypto-assets, what it means for the UK’s economy and whether this intervention is necessary.

What are Crypto-assets?

Cryptoassets are global and profitable sources of trading, and exist electronically with a peer to peer system. What is unique about crypto-assets, is how they are based on future value and generally viewed as investments but just as the value may rise it can also drop dramatically. The volatility of crypto-assets is a significant factor that can lead to colossal losses and an opportunity for fraud. The well known crypto-assets is Bitcoin which has enjoyed notable increases.

Why has the FCA introduced a ban?

The Financial Conduct Authority has introduced a ban on the sale of crypto-assets to retail consumers effective 6th January 2021.The reasons include volatility of the product and consumers’ lack of knowledge leading many to invest in crypto-assets without knowing the full risks. The ban also includes any exchange traded note which is a form of unsecured debt security issued by a bank and traded on exchanges.

This ban is a protective intervention on behalf of retail consumers, as the cryptocurrencies cannot accurately be valued and can be prone to fraud which when paired with the continuous threat of cyber and financial crime, creates a turbulent environment. As retail consumers invest in cryptocurrencies, they can suffer losses with this ban £53 million a year will be saved, indicating this regulation to be a welcome measure to protect consumers. However, firms that provide crypto-assets have started to face declines, for example CMC Markets Plc has faced a 6.2% decrease and IG Group Plc’s sales fell to 3.8%. Although corporations such as IG have put forth a statement that the ban will not substantially affect their business but with the added pressure of the global pandemic and a gloomy economic picture, this may soon change.

This intervention is significant as it strengthens the expected integrity of the UK’s financial system especially as there is an increased trend of investment from first-time retail consumers who may not fully comprehend the risks and the increased threat of cybercrime across crypto derivatives platforms.

What is not included in the ban?

The ban does not include UK retail clients, who look to purchase crypto-assets from firms outside of the UK that do not already sell crypto-assets derivatives within the UK, highlighting how the ban is not completely uniform which may undermine the effectiveness of this intervention. Considering the fact that some retail consumers may want to invest in crypto-assets, through this loophole, they may resort to investing with firms outside of the UK, therefore increasing the possibility of harm and losses. While the Financial Conduct Authority is aware of this opportunity for consumers, the organisation is continuously monitoring firms’ movements from ‘’moving retail consumers to associated non-UK entities.’’

The Financial Conduct Authority’s ban does not include Bitcoin and Ethereum which are not regulated by the authority. Furthermore, retail consumers who have already invested are able to continue holding onto their investment and are not legally bound to disinvest it.

Why is this ban necessary?

The volatility of cryptoassests is due to the fact that the valuation process of cryptoassests is subjective leading to huge variations. Therefore without a central, reliable model of valuation it provides an opportunity for retail consumers to suffer heavy losses. What is more concerning to the Financial Conduct Authority is how crypto-asset prices are contingent on speculation making it further difficult for them to be valued accurately, for example, 47% of consumers who bought crypto-assets viewed them as a gamble that could make or lose money.’ This highlights that many retail consumers do not have a legitimate investment need and are instead making a risk. The legitimate uses of crypto-assets have been well-documented, for example, hedging which the Financial Conduct Authority has regarded as more of a speculative purpose similar to gambling.

The rising price of crypto-assets such as Bitcoin which hit an all time high indicate that the size of the derivatives market is huge and likely to keep growing. This raises the question of whether the value crypto-assets can bring to the market may be impaired due to this regulation. However, this regulation tackles losses experienced by consumers and seeks to curb the sale of crypto-assets due to a lack of knowledge and the volatility of this currency. The regulation is a step forward in protecting consumers from the volatility and misleading information. Consumer protection should be central in the economy and this ban is a proactive measure that will strengthen the integrity of the UK’s economic system. The question of whether this move to regulate crypto-assets markets is an indicator of a wider trend to tackle the dark side of digital currency is being removed.

Further reading

FCA bans the sale of crypto-derivatives to retail consumers

FCA bans crypto derivatives to save investors £53m a year

The end of the wild west: FCA confirms ban on sales of crypto-asset derivatives to retail consumers

2020 Q2 Cryptocurrency Derivatives Exchange Industry Report

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