The ban on crypto derivatives in the UK will officially come into effect today, industry insiders criticize the move as "doing more harm than good."

The cryptocurrency derivatives ban issued by the Financial Conduct Authority (FCA) in the UK in October last year will officially come into effect in the UK on January 6th. The regulatory body stated that the ban will help prevent approximately £53 million in investment losses.

Crypto Derivatives Ban

The UK Financial Conduct Authority (FCA) previously announced in October 2020 that cryptocurrency derivatives and exchange-traded notes (ETNs) have extremely high risks and are not suitable for retail investors. In order to protect investors' interests, the regulatory body will prohibit all institutions from providing retail investors with related derivative trading services in the UK. The ban will officially take effect in the UK from January 6th. The reasons given by the FCA at that time include:

• Underlying assets lack reliable valuation
• Presence of manipulation, hacking, and other illegal activities in the secondary market
• Extreme price fluctuations
• Lack of understanding among retail investors regarding crypto assets

Sheldon Mills, Executive Director of Strategy and Competition at the FCA, stated in the announcement:

"We have a significant evidence that suggests the volatile price movements, coupled with the difficulty in assessing the true value of crypto assets, make it highly likely that retail investors will suffer losses through derivative trading, and the ban will protect investors. Following implementation, we estimate that investors will save £53 million (approximately $68 million)."

Effects May Not Meet Expectations

Following the implementation of this ban, cryptocurrency asset management companies like CoinShares and trading platforms like eToro will be affected.

Traditional investment companies with an interest in cryptocurrencies are also impacted. For example, investment company Hargreaves Lansdown, a constituent of the FTSE 100, and online trading platform IG have announced the suspension of buying orders and the cessation of trading services for such products as per regulations.

Regulators believe that the ban will help prevent around £53 million from evaporating in the cryptocurrency derivatives market, but industry researchers are concerned that it will instead push investors towards unregulated or offshore exchanges, thereby exceeding the FCA's regulatory scope. Dermot O’Riordan, Partner at Eden Block, a European venture capital firm focused on blockchain technology, expressed worries about the ban, stating that it shows the FCA fundamentally lacks understanding of how to regulate this field:

"It's unfortunate as market participants like Coinshares and Crypto Facilities, who provided compliant crypto derivative products to retail investors, were performing quite well in this space. This move will force retail investors to turn to unregulated platforms such as Deribit and BitMEX, which will offer less protection than regulated participants. Therefore, it's currently unclear how ordinary retail investors will benefit in this situation."