Will UK FCA’s Crypto Derivatives Ban Be Effective for Consumer Protection?

On 6 October 2020, the United Kingdom’s Financial Conduct Authority (FCA) released a new policy stating that retail marketing, distribution and sale of crypto derivatives and crypto exchange traded notes (ETNs) are to be banned, with the policy taking effect starting 6 January 2021. The FCA explained that the nature of cryptoassets, the existence of market abuse and financial crime, the severe volatility in its price movements and consumers’ lack of understanding in cryptoassets as well as the lack of a real need to invest in it led to the final decision to implement the crypto derivatives ban policy. 

The FCA has delivered a significant blow to UK investor freedom. Through banning the trading of crypto derivatives, we can expect UK trading space to move elsewhere. The demand for these securities continues to rise, with crypto derivative volumes reaching new highs this summer. It’s a lost opportunity for the UK.  This policy affects all investors, including the large institutions who have adopted cryptocurrency derivatives, who will now have to relocate any London-based trading.  

The FCA’s so-called ‘consumer protection’ measures should be focused on weeding out existing scam companies and prioritising consumer education, rather than crippling investment opportunities and withdrawing from an area of growing importance in the financial markets. 

We certainly believe there should be measures to protect consumers, but this move disregards the rising demand among retail consumers to participate in the cryptocurrency space. Aside from the growing investor appetite, which is largely due to market volatility, traders are able to avoid the hassle of owning the assets and storing them in wallets. 

With the UK no longer an option, crypto traders and businesses will be looking to set up shop elsewhere. What we see is an international race to attract and encourage the use of digital assets. This activity will move to where the environment is friendliest, which will most likely be the rest of Europe and Asia. For example, The European Union has recently voiced intentions to regulate cryptocurrency assets to provide more security and certainty to investors. If successful, the EU will find it beneficial and they can become a hub for cryptocurrency trading activity.  

Many investors in other parts of the world will see this move as overly cautious, particularly considering existing leverage restrictions. Brokerages and exchanges in the UK will suffer most from this ban, but it’s important to note that this is a ban on derivative products and not on cryptocurrency itself, which shows that the UK authorities still recognises the value in crypto. 

In the case of retail traders, those still keen on trading crypto derivatives will just find ways to open accounts in unaffected regions. On the other hand, this could have the opposite effect than what was intended. There is a stark risk that retail traders will simply trade on unregulated exchanges, which in fact puts them at more risk. Much better to have them trading on approved, well-established platforms. 

All in all, it is right that the FCA took measures to mitigate the negative impacts crypto derivatives and ETNs may bring to consumers who are not educated enough on it. It is pertinent to note that this is not a ban on cryptos itself, and signifies that the FCA still recognises the inherent value of digital currencies. 

However, we believe that there are always better ways to tackle the issue of what steered the UK FCA to implement the ban policy such as with consumer education and removing scam companies. Banning crypto derivatives and ETNs might be too extreme and far-fetched especially when this industry is growing so much and the ban will affect brokerages and exchanges in UK the most.