UK shreds mum and dad crypto-derivatives
Good regulation aids credibility.
A little over 18 months ago in Regulation is the Antigen to fuel adoption, I wrote the following:
“Whether we are talking about social, legal, political, fiscal/tax, environmental or other regulation for autonomous vehicles, drones, cryptocurrencies, private crowdfunding, robots, trade or anything else - the right balance needs to be struck so there can be viability and progress with acceptable levels of trust, safety and security.
What good is a theoretically 'trustless' public block chain, autonomous vehicle or drone if unregulated actors can't be trusted or held accountable; or if the legal system and insurers can't decide on 'fault'?”
I thought it worth revisiting the concept of regulation being the path to adoption in the context of the UK’s recent banning of cryptocurrency ETFs.
Policy Statement PS20/10 from the UK’s Financial Conduct Authority (FCA) provides for the prohibition on marketing, distributing, and selling derivatives and exchange traded notes that reference cryptoassets to retail consumers in, or from, the UK, by 6 January 2021.
The prohibition applies to the provider, not the client. That is, retail consumers with existing holdings can remain invested following the prohibition, until they choose to dis-invest. There is no time limit on this, and the FCA does not require or expect firms to close out retail consumers’ positions unless consumers ask for this.
You can read the full policy statement here.
FCA’s reasoning no betrayal to underlying.
The reason for all this is that the FCA feels that retail consumers cannot reliably assess the value and risks of derivatives and exchange traded notes that reference certain cryptoassets because it believes the following:
The underlying assets have no inherent value and differ from other assets that have physical uses, promise future cash flows or are legally accepted as money.
Market abuse and financial crime (including cyberthefts from crypto-asset platforms) in present in crypto-asset markets.
Extreme volatility in crypto-asset prices.
Inadequate understanding of cryptoassets by retail consumers and the lack of a clear investment need for investment products referencing them.
The FCA concluded that retail consumers will suffer harm from potentially sudden and unexpected losses if they buy these products.
In other words, crypto-derivatives do not meet a legitimate investment need and are no better than gambling.
But it’s important to note that despite the sensationalised headlines, this regulation is not a spray against the underlying cryptos.
Rather, it speaks volumes against shark-staffed money shops that prey on mum and dad investors by derivatising/leveraging cryptos, just to make a quick buck.
Bring it.
With investors being pushed further out along the risk curve in order to generate returns, the current market environment is highly conducive to the sale of highly levered assets like derivatives, even to mums and dads – and that’s why this retail consumer regulation is welcome.
If it can stop money shops exploiting the strong demand for the underlying asset, PS20/10 and similar regulations elsewhere should accelerate crypto acceptance and credibility.
Stay safe, and avoid the sharknado, unless you’ve got a big chainsaw.
Mike.
Next Level Corporate Advisory is a leading independent financial and strategic advisor with a multi-decade track record that speaks for itself. We focus on delivering strategic M&A, private equity, structured finance and transformative corporate finance solutions designed to take your business to the next level, in and out of Australia.