The cryptocurrency community has reacted strongly against a ban on cryptocurrency derivatives in the UK. Arguing that it could potentially set the country back against the global trend and stifle innovation.
The UK ban on cryptocurrency derivative sales to retail investors came into effect on 6 January, following the Financial Conduct Authority’s (FCA) announcement in October 2020 that the sale, marketing and distribution of crypto-based investment products would be prohibited for retail customers.
There are concerns that too much regulation could stifle innovation. While the FCA is trying to protect consumers, some argue that the recent ban could drive consumers to take unnecessary risk via less regulated avenues.
Jess Spiro, chief of government affairs at blockchain company Chainalysis, explained that there may be a potential for users to turn to unregulated platforms with fewer compliance controls and, on average, more illicit activity flowing through them. “They are also less likely to engage with and support law enforcement and regulatory actions, which at the end of the day makes it more difficult to protect consumers,” he said.
However, Mark Simpson, partner at Baker & McKenzie, said that “what they have done is relatively predictable because of the consumer protectionist agenda that the FCA has in terms of derivatives for retail clients generally, but in particular for volatile assets”.
There is also a strong likelihood that UK investors may now turn to other countries where regulations are less stringent.
While it is difficult for non-FCA licensed firms to offer products to UK consumers, it remains a possibility that trading could also migrate to overseas platforms. According to Baker McKenzie’s Simpson: “Even if other jurisdictions want to have lower or more permissive standards, it doesn’t mean the FCA won’t raise its own standards. This is something they want to regulate in the UK.”
The FCA considered other policy alternatives but eventually opted for an outright ban, stressing that the move is the best way to protect retail customers in the UK. Alternate policy arrangements would not have addressed the fundamental issues posed by crypto derivatives, which is the difficulty that investors have in valuing the underlying assets, they suggested.
Simon Taylor, co-founder and blockchain practice lead at 11:FS, a fintech consultancy company based in the UK, sees merit in the FCA’s ban, suggesting that “complex financial products for consumers can be dangerous, with the risk of getting into debt they can't afford to repay through leverage”.
“So, it's sensible to expect some protection. However, the outright ban appears to be a bit of a blunt instrument,” he added.
The FCA’s recent use of heavy-handed tactics is also somewhat inconsistent. It remains possible to trade binary options in the UK, despite it being a high-risk asset for retail customers. “The FCA have started to use these product intervention powers, including prohibitions, more often in recent times on other derivatives and other capital instruments. So, it seems to be a bit of a trend.”
More regulation to come
On January 7, HM Treasury published an open consultation report on the UK regulatory approach to crypto-assets and stable coins. In the consultation, John Glen MP, economic secretary to the Treasury, reaffirms that the UK are committed to “creating a regulatory environment in which firms can innovate, while crucially maintaining the highest regulatory standards so that people can use new technologies reliably and safely”.
However, the paper states that many crypto assets and unregulated tokens remain highly volatile and it is likely that further regulation will established. The paper cites three main risks; to financial stability and market integrity, to consumers, and to competition.
Simpson believed that the government is looking at a broader set of measures around cryptocurrencies. “This is probably going to lead to more regulation in this space over time rather than less regulation,” he said.
This is firmly against the global trend. The ban comes into effect as many countries around the world are becoming more accepting of cryptocurrencies, and introcing crypto and blockchain friendly regulations.
In the US, the cryptocurrency industry is a massive growth area with regulators much more forward looking. For example, the Office of the Comptroller of the Currency (OCC) recently allowed banks to hold crypto assets. The Securities and Exchnage Commission (SEC), however, recently sued payment company Ripple because of its XRP token, showing that the agency is not taking the issue lightly.
In December 2020, Singapore launched the first cryptocurrency exchange in the world backed by a traditional bank. Government banks in the US, Sweden, China and elsewhere have started to test digital applications, and the concept of a truly digital currency appears closer to fruition.
The price of Bitcoin surpassed $40,000 in early January, and industry hype is reaching levels not seen since 2017. These trends point to a rise in cryptocurrency and blockchain in mainstream financial services. However, the UK appears to be taking the opposite route.
11:FS’s Taylor explained that the FCA has been able to successfully balance between innovation and consumer protection in the past, “but the signal this ban sends to the rest of the world is that the UK is no longer the country that produces nuanced, cutting edge regulation for crypto”.