UK’s anti-crypto stance “aggressive and outmoded”

By Alex Hamilton | 12 July 2019

The Financial Conduct Authority (FCA)'s proposed crypto-derivatives ban is aggressive and outmoded, according to Townsend Lansing, chief commercial officer at TokenMarket.

The FCA announced last week that it would be consulting on banning the sale, marketing and distribution of derivatives and exchange-traded notes (ETNs) referencing crypto assets to all retail customers. The consultation runs until October 3.

“It is the most aggressive regulatory statement in a Western jurisdiction I have seen,” says Lansing. “Places like China have obviously banned and drove it underground, but from a major Western regulator this is an aggressive anti-crypto move. The FCA is going to push people to unregulated online exchanges that have zero supervision or to offshore exchanges in other jurisdictions. The FCA even admits in its own paper that it is going to do so.”

The consultation paper – in which the regulator also states that cryptocurrencies have no inherent value - suggests the UK crypto derivative market could be harmful to consumers with losses amounting to anything from £75m to £234m. The paper further stipulates that while crypto derivatives could “pose similar harm to wholesale investors”, the ban would not impact institutional investors.

Michael Harris, director of financial crime compliance at LexisNexis Risk Solutions, welcomes the proposal.

“The whole crypto asset world is one that is evolving rapidly, and little understood by many outside of the regulatory framework,” he says. “Crypto derivatives, like other derivative trading tools, are fraught with risk. On a personal level I think it’s not a bad move at the moment until we understand more about crypto and whether or not there is a fair playing field.”

In a statement accompanying the proposal FCA executive director of strategy and competition Christopher Woolard said: “Most consumers cannot reliably value derivatives based on unregulated crypto assets. Prices are extremely volatile and as we have seen globally, financial crime in crypto asset 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.”

Harris says the responsibility for education is an important question. “Is it the regulators job? In the general sense, more education needs to be available to retail customers for all derivatives – from straight forward spread betting to forex to contracts for difference (CFD). If you ask the man on the street for an explanation of what bitcoin is I think you would struggle to get much in the way of a detailed answer. Who would provide this education? I’m not sure.”

Lansing believes that the wording used in the FCA’s proposal could have a wider impact on the cryto market. “If you look at the FCA’s language around banning the exchange-traded notes (ETNs), it should follow that they want to ban retail from accessing crypto in any circumstances. I don’t feel that the FCA has considered the regulatory arbitrage and lack of consistency in this approach. If the goal is really to prevent retail from getting crypto it should come out and say that and justify it by making things as expansive as possible.

“The language is very much ‘we don’t think retail should invest in this,’ and that it’s trying to rule in areas it has regulatory supervision. Surely it has regulatory supervision in other areas? Revolut and others facilitates more crypto investment than any other regulated entity right now in the UK. Why is the FCA picking on ETNs and not money service providers who happen to do transfers into crypto?”

Harris says the fifth anti-money laundering directive (5MLD) is going to bring in an obligation to carry out thorough and proper due diligence on cryptocurrency transactions. “The Revoluts and whoever else enables their customers to convert into bitcoin is going to be subjected to regulation. So, they’re not going to be totally off the hook and completely unregulated going forward.

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