UK FCA bans retail trading of crypto derivatives, Weiss Ratings: Stock market should also be banned while they're at it

The Financial Conduct Authority (FCA) of the United Kingdom announced yesterday (10/6) that it will ban trading platforms from offering cryptocurrency derivative products such as futures, options, and Exchange Traded Notes (ETNs). The ban will come into effect on January 6, 2021.

This comes shortly after the derivatives exchange BitMEX was accused by the U.S. Commodity Futures Trading Commission (CFTC) of operating without proper registration, violating anti-money laundering laws, and arresting its co-founder, Samuel Reed. However, less than a week later, the highest regulatory authority in the UK has imposed a ban.

Designed to Protect Retail Investors

According to the FCA announcement, the regulatory body believes that such products have become harmful and are not suitable for retail investors, especially since retail investors may not accurately assess their risks. The reasons given by the FCA are as follows:

• Underlying assets lack reliable valuation
• Existence of manipulation, hacking, and other illegal activities in the secondary market
• Extreme price fluctuations
• Retail investors have insufficient knowledge of crypto assets

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

We have a significant evidence base to indicate that the extreme volatility, combined with the difficulty of reliably valuing cryptoassets, places retail consumers at high risk of suffering losses from trading derivatives. The ban will protect consumers, and we estimate that it will save retail investors around £53 million (approximately $68 million) in losses.

Furthermore, in another policy statement, the FCA pointed out that any firm providing retail investors with derivatives trading services in the UK must cease trading by January 6 next year, but users are not required to close their positions. There is no time limit on this measure, and trading platforms are not encouraged to forcibly close user positions.

Questions Arise Regarding the Ban's Effectiveness

Although the FCA's move to regulate cryptocurrency derivatives seems significant, the issue of users accessing overseas platforms remains unresolved, casting doubt on the actual effectiveness of the ban. Cantering Clark, Co-founder of the crypto analysis platform Blockroots, pointed out on Twitter:

This is a non-event really, but still interesting. The UK regulator claims to be "protecting" the public by allowing spread betting and allowing retail to trade crypto derivatives via overseas platforms.

It is understood that high-risk spread betting is rapidly growing in the UK, with potential losses far exceeding the initial investment. Weiss Crypto Ratings also stated on Twitter:

FCA banning crypto derivatives for retail is harmful to users. By this logic, they should ban stocks and traditional market trading, which cause far more losses to users than crypto derivatives.

On the other hand, the globally renowned brokerage firm eToro claims to be unaffected. Edward Drake, Head of Compliance at eToro UK, stated that 84% of eToro UK users hold spot assets and believes that eToro will experience lower impacts compared to other platforms.