Cryptocurrency products could be distributed under new rules in the UK as the Financial Conduct Authority (FCA) plans to protect consumers against risks.
Retail investors could be facing a complete ban on crypto derivatives as authorities consider these products to be too volatile and ill-suited to small-time investors.
In a nutshell, authorities believe that many people don’t really understand what they’re buying or how these financial instruments work. This means that they’re more likely to make rushed investment decisions that could cause a sudden loss of their savings.
To protect retail users from their lack of knowledge, the FCA is ready to ban hazardous cryptocurrency products from the UK financial market.
What cryptocurrency products could be banned?
The new rules apply to financial instruments with prices based in digital currencies. As the FCA can’t stop people from buying them, the organisation is looking into ways of banning companies from selling them instead.
These crypto assets include futures, contracts for difference (CFDs), exchange-traded notes (ETNs), and other crypto derivatives. The ban could apply to all firms acting in or from the UK that sell, market, or distribute these types of cryptocurrency products.
The legislation would ban almost any type of crypto product that enables retail investors to speculate on cryptocurrency prices. That’s because most of them are considered too complicated and risky for unaccredited investors.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA, remarked:
“As with our work on the wider CFD and binary options markets, we will act when we see poor products being sold to retail consumers. These are complex contracts built on top of complex assets.”
So, companies won’t be able to sell cryptocurrency products that could generate large gains or losses based on an asset’s current or future price.
A rigid stance on cryptocurrency products
The UK’s financial regulator aims to protect consumers with this rigid new position on cryptocurrencies. The organisation believes that certain crypto assets lack transparency, which doesn’t allow investors to make informed decisions.
The FCA argues that end-users can’t estimate the value and risks of crypto derivatives accurately. Some of the reasons mentioned by the regulator are:
- Most crypto assets have no reliable basis for valuation, which makes it hard for investors to evaluate the assets correctly.
- Cybercrime makes the environment prone to market abuse and financial crime.
- Crypto assets often deal with extreme volatility.
- The lack of transparency also leads to inadequate understanding of crypto assets by most retail consumers.
Investing in cryptocurrency products could therefore lead to unexpected losses of funds, with negative effects on retail consumers. The FCA also estimates that end-users could lose (or gain) between £75 million to £234.3 million a year by making “unsuitable” investments in cryptocurrency products.
A possible move to counter Libra
The FCA’s potential new rules come right after Bitcoin’s price correction. The coin lost almost 30% of its value when its price fell below $10,000 from a peak of nearly $14,000 at the end of June.
It’s possible that Libra could have had a hand in BTC’s price drop, and it may be the trigger for the FCA’s decision to ban cryptocurrency products. Not long before the announcement came out, Woolard had expressed his concerns over consumer protection regarding Libra. So, it could be no coincidence that the FCA has taken a new position on cryptocurrency products at this moment.
Cryptocurrencies have become very popular on social media, which is looking to expand to payments and even investment tools. The FCA is afraid that crypto assets could become even more successful through association and warns about the risks of this new trend.
Not just cryptocurrency products to be banned
The FCA isn’t targeting cryptocurrency products only. The regulator has introduced a new series of rigid rules regarding all contracts for difference (CFDs). According to the new requirements, these financial instruments are too complex for end-users, so limits are required to protect them.
The FCA has introduced a series of measures intended to clarify the scope of products and the methodologies for risk warning. This way, the authorities hope to reduce risks for retail investors.
In 2018, Brits lost more than £27 million due to forex and cryptocurrency scams alone. The number shows that most people still don’t understand how cryptocurrency works. Moreover, many retail investors lack the knowledge necessary to make educated financial decisions.
It’s hard to estimate exactly how many people have lost money from making bad investments, but the numbers revealed by the FCA are alarming. The possible ban could save people over £200 million a year. However, it could also cut down business opportunities for non-accredited investors who understand “complex” crypto assets.