Why an Outright Ban on Trading Cryptocurrency Derivatives is Unnecessarily Cautious

By Viktor Prokopenya, Founder, Capital.com

The current outright ban by the UK’s FCA on leveraged cryptocurrency trading using derivatives, ETFs, CDFs, and spread bets for retail traders is a cautionary tale of the dangers of overregulation in our financial spaces.

The FCA enforced this ban on the 6th of January, 2021, citing concerns around volatility and a lack of consumer knowledge. Whilst there are legitimate concerns around current cryptocurrency regulation globally, this outright ban speaks to a failure to recognize the current landscape of online trading, as well as the consequences the UK will face as a result.

The primary challenge arising because of this ban is the implications for user experience.  Consumers want simple and efficient products, and the companies that do well are those that recognize this. Take Amazon as an example – one marketplace that enables customers to purchase a huge variety of products on a single convenient platform.

The same principle applies to the finance industry. The UK ban on the trading of crypto derivatives impacts not only this market share but also the market share of other areas of trading on UK platforms. Considering that no other EU country followed the UK ban, the alternatives are plentiful. It seems as though the UK is intent on artificially disadvantaging itself — a bad choice as it looks to compete outside the European economic block in the coming decades.

The result of this is that the UK government and its regulators risk dampening the strong growth of the British fintech sector and granting comparative advantage to other jurisdictions such as the USA, Germany, Sweden, Brazil, and Dubai, all of which have greenlighted the use of certain regulated derivatives, ETFs and some use of controlled leverage among retail investors interested in cryptocurrencies.

The ‘Global Britain’ project will not succeed if it continues to ignore financial innovation across the global market. Financial products tied to cryptocurrencies have found success in other countries with over 50 services on offer globally with combined assets of over $14bn. If the UK wants to continue powering the impressive growth of its fintech sector over the last year, which is at an all-time high of $37.3bn in investment, it should include responsible leveraged trading of cryptocurrencies as a vital part of its ecosystem. 

Moreover, there has not been a pragmatic acceptance of the exponential growth in both retail investment and cryptocurrency sectors. Last year some figures suggested that up to 20% of the total volume of FTSE All Shares orders in the UK could be traced back to retail accounts in 2020. Additionally, as the FCA itself reports, crypto holdings have increased in the UK by 400,000 from 1.9 million in 2020 to 2.3 million in 2021 — just under 4% of the adult population. Among a smaller segment of the population with financial advisers, as a survey by WisdomTree reveals, over 72% of UK advisors have spoken to their clients about cryptocurrency investment and 45% of clients have intended to invest in cryptocurrencies.

Many of these investors, incentivized by the practical applications of leverage, are opening offshore accounts with trading platforms operating in other jurisdictions: often exposing themselves to highly risky and inflated leverage ratios in underregulated spaces that do not provide any in-house educational tools.

The banning of derivative products, leverage, ETFs, and CDFs that trade on the price of cryptocurrencies like Bitcoin, Ethereum, and Tether will make it harder for those within the UK to access this growing and important market. It might also disincentivize investors looking for larger returns on risk or access to the growth of the cryptocurrency market through means that sidestep the complexity of storing, mining, or securing actual tokens on the blockchain. Many investors, including retail traders, also prefer to access cryptocurrencies through established means on trusted trading platforms: rather than risk holding crypto themselves.    

The solution is to allow a responsible level of leveraged trading within the crypto sphere.

The UK must remember the democratisation of financial knowledge and financial access through developments in the fintech sector. Indeed, most investors in cryptocurrency are young, highly educated, and in professional occupations.

Already educated, these retail investors are also in a perfect position to benefit from the information and safety services offered by large trading platforms and hold the knowledge and expertise to trade derivatives successfully.

For example, limiting the higher risk derivative trading to professionals, or those who have a minimum amount of crypto trading experience. This can be achieved through a communicative three-way collaboration between the FCA, retail traders, and trading platforms that create an atmosphere of democratized financial participation alongside responsible limits and safety mechanisms that limit the risk inexperienced traders are exposed to.

The current situation, whereby experienced and knowledgeable UK investors might take their money offshore and risk exposure to more relaxed regulation deprives the British arena of the accumulated knowledge these traders possess. Consequently, this makes it harder to create sensitive and sector-specific regulations. 

The UK would benefit from recognizing its outlier status among developed economies when it comes to banning leveraged crypto trading and instead attempts to build a responsible and safe environment for financial innovation that allows retail traders to use leverage to benefit from market growth. We need the ability to participate in a major and growing global sector that looks more important by the day. Having educated traders with access to a responsible amount of leverage is an integral part of that aim and gives those with the knowledge and skills the freedom to trade in the way they want. A reduction in freedom ultimately leads to a reduction in trust and will only serve to damage the financial industry.

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