FCA proposes ban on digital currency derivatives

Britain’s financial watchdog says retail customers ‘cannot reliably assess the value and risks’ of these products.

Britain’s financial watchdog has proposed a ban on financial instruments linked to digital cryptocurrencies such as Bitcoin to retail customers, saying they “cannot reliably assess the value and risks” of these products.

The Financial Conduct Authority (FCA) said the sale of derivatives, exchange traded notes (ETNs) and contracts for difference linked to cryptocurrencies are “ill-suited” to retail investors. 

The regulator said the four reasons for its proposals are due to:

• inherent nature of the underlying assets, which have no reliable basis for valuation

• the prevalence of market abuse and financial crime in the secondary market for cryptoassets, such as cyber theft

• extreme volatility in cryptoasset price movements

• inadequate understanding by retail consumers of cryptoassets and the lack of a clear investment need for investment products referencing them

It added these elements “mean retail consumers might suffer harm from sudden and unexpected losses if they invest in these products”.
The regulator said it was consulting on banning the sale, marketing and distribution of these products to all retail consumers.

Benefit consumers

It estimated a ban would benefit consumers by between £75m and £234.3m a year.

FCA executive director of strategy & competition Christopher Woolard said: “Most consumers cannot reliably value derivatives based on unregulated cryptoassets. Prices are extremely volatile and as we have seen globally, financial crime in cryptoasset markets can lead to sudden and unexpected losses. It is therefore clear to us that these derivatives and exchange traded notes are unsuitable investments for retail consumers.”

The wild price swings of digital currencies such as Bitcoin is behind the FCA’s move.

The price of bitcoin fell below $10,000 (£7,950) on Tuesday, down 30 per cent from last week’s peak of nearly $14,000.

Libra bounce

Bitcoin had traded below $6,000 for months but has been buoyed by Facebook’s plans to launch its own digital currency, announced last month.

Some analysts say Bitcoin could hit $20,000 as it did two years ago – or fall as low as $3,000. 

In late 2017 it nearly reached $20,000 before a spectacular collapse in 2018.

Nutmeg, the UK’s the first online wealth manager launched in September 2012, backed the FCA’s move.

‘Cesspool’

Shaun Port, Nutmeg chief investment officer, said: “These assets have generated a lot of media hype and have even been the focus of social media platforms looking to branch out into investments and payments, but the reality is, it is very difficult for anyone to reliably assess the risks associated with them. There are issues with volatility, transparency, custody, fraud, liquidity and diversification.”

The outspoken US economist Nouriel Roubini, nicknamed Dr Doom for his gloomy warnings, likened Bitcoin to a “cesspool”, at the Asia Blockchain Summit in Taiwan earlier this week.

Roubini, who predicted the 2008 financial crisis, said Bitcoin would end up in the "museum of failed coins" along with all the other digital currencies.

He added that the digital currency was "not secure, not decentralised and not even scalable".