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UK crypto derivatives ban fails to protect retail investors – Financial Times

The valuation of cryptocurrencies  has increased dramatically in the past 12 months, as has their adoption by investors around the world — individuals as well as institutions.

Until a few years ago, most retail investors would have required the use of a broker or investment professional to handle their investments. Today, consumers flock to apps and platforms that enable them to make direct investments on their own, without an intermediary, both in traditional financial assets — and increasingly in crypto.

In a sign of how accessible digital assets have become even to retail buyers, US regulators last month authorised the country’s first crypto derivative ETF, for bitcoin, the most popular digital currency. In giving permission, officials followed their counterparts in jurisdictions as diverse as Canada, Germany, Dubai and Brazil.

And where is the UK in all this? Lagging behind is the answer. Far from preparing to join the global drive in giving retail investors good access to crypto products under the safety umbrella of strong regulation, the Financial Conduct Authority is sticking to a ban it introduced last January, prohibiting the sale of crypto derivatives to retail customers.

This must change. The restrictions do not really work because investors can still buy such derivatives abroad, or through roundabout ways outside the regulators’ control. Far from enhancing investor protection, the measures risk compromising it.

Instead of boosting Britain’s position as a global financial centre, an unduly cautious approach to crypto limits the UK’s ability to develop a share of this fast-growing revolutionary market.

Certainly, the FCA is right to focus on investor protection and to be concerned that such a rapidly-developing market poses dangers to investors. But it needs to adapt its heavy-handed approach to a more flexible policy that can still offer investors the required level of safety.

Post-Brexit, the UK is strategically positioned to take a proactive stance on retail crypto adoption, but has instead taken a “wait and see” approach and consistently raised concerns about consumer protection, which at times has been inconsistent with its own research.

The UK’s Financial Conduct Authority (FCA) published a survey this year noting that the majority of crypto asset owners are generally knowledgeable about the product, aware of the lack of regulatory protection and understand the risk of price volatility.

However, when the FCA in January announced its ban on the sale of crypto derivatives to retail clients it said that “retail consumers can’t reliably assess the value and risks of derivatives like contracts for differences (CFDs), futures, options and exchange traded notes (ETNs) that reference certain cryptoassets”. The FCA’s reasons included concerns that consumers did not have a “reliable basis for valuation” and that retail customers had an “inadequate understanding and a lack of clear investment need”. 

There is an obvious contradiction here between this statement and the FCA’s own survey.

The regulator’s decision was largely viewed by the industry — which advocated a more balanced approach involving protective measures such as placing a ceiling on leverage — as unnecessarily cautious. It’s difficult to understand who this decision protected, given that UK customers are still able to open offshore accounts which offer derivatives trading with up to 100 times leverage.

I believe most do so with their eyes open. Retail investors entering the complex world of crypto and digital assets are required to “do their research”. And many are doing so.

The FCA derivatives ban seems strangely misaligned with the UK’s historical successes as a fintech hub and the government’s commitment to be a competitive and innovative jurisdiction for financial services. Even in the EU, often seen in Britain as a bureaucratic monster slow to keep up with financial pioneering, there are no similar bans. Nor in the US or most of Asia.

Last week’s move by the US authorities only emphasises how isolated Britain risks becoming. In fact, the US Commodity Futures Trading Commission, has been overseeing regulated crypto derivatives markets for nearly three years with products that offer a reliable basis for valuation. These markets are accessible to retail as well as professional investors.

In a welcome development, the UK government has consulted on proposals to bring the promotion of certain types of crypto assets within the scope of existing rules — in an apparent effort to increase information flows and transparency.

The regulator also recently launched a new “InvestSmart” campaign, aimed at helping consumers make better informed investment decisions, and to create risk awareness, especially for younger crypto investors.

The FCA is also researching the possible inclusion of crypto assets in the “High Risk Investment” category available to wealthier and properly advised investors. This includes other such assets as non‑readily realisable securities, peer‑to‑peer agreements and speculative illiquid securities.

CryptoUK works closely with the FCA and supports initiatives designed to educate consumers in evaluating risk and highlighting crypto-specific investment nuances.

However, there is a fine balance in protecting the vulnerable while acknowledging the growing demand for regulated crypto products from well-informed retail investors.

Even with regulatory barriers, UK retail customers’ appetite for crypto continues to grow. The FCA estimates that the number of consumers holding cryptocurrency has risen to 2.3m in the 12 months to June 2021 — from 3.9 per cent to 4.4 per cent of adults in the UK.

We should strike a regulatory balance for crypto investing that mitigates risk adequately, but does not stifle the many societal benefits crypto can bring to retail investors, not least the opportunity to create considerable wealth.

Ian Taylor is director of Crypto UK, an industry association