It has cited a number of reasons why the products cannot be “reliably valued” by retail consumers, including financial crime, volatility, and a lack of understanding of crypto assets as the main ones. It is estimated that private investors will save $ 53 million through this ban. This is despite the fact that the FCA has a Research stating that UK consumers have invested an estimated $ 2.6 million in crypto assets.
While the main intent of this prohibition is to protect retail investors from the complexity of these products, the assumption that retail investors in the UK have insufficient knowledge of crypto assets may be incorrect. Jesse Spiro, global head of policy and regulatory affairs at Chainalysis – a blockchain analytics firm – told Cointelegraph, “ Given the amount of available information and market intelligence now regularly produced about the cryptocurrency ecosystem, there are many private investors who degree of technical expertise and knowledge. “
Derivatives growth driven by institutional investors
Last year there were crypto derivatives are going through a massive growth phase, where outstanding interest in Bitcoin options tripled in 100 days, to an annual high of $ 6.8 billion on December 31, before growing even further amid a bull run in early January, and a record high of Reached $ 10.5 Billion While this growth must also include increased interest from retail investors, there are several indicators that this growth has mainly grown thanks to the involvement of institutional investors.
The Chicago Mercantile Exchange is one of the most important exchanges for institutional investors to expose themselves to digital assets through Bitcoin futures and options. The platform has reported those Bitcoin’s (BTC) average daily volume grew 114% year-over-year in 2020, increasing average daily open interest on CME by 252%. Unique active accounts also rose to 6,700, an 84% year-over-year growth. The main indicator of institutional importance, the number of large holders of outstanding interest, grew to a record 110 in December, as shown in the chart below.
The United Kingdom Financial Conduct Authority prohibited the sale of crypto derivatives and exchange-traded notes to retail investors as of January 9, 2021. The main underlying reason for this of the FCA is that the products “are not suitable for retail consumers because of the harm they cause”.
Jay Hao, CEO of crypto and derivatives exchange OKEx, told Cointelegraph that “crypto assets are indeed volatile, as the FCA notes, and that many investors have lost a lot of money when transactions don’t go well.” However, he added, “The problem is that when retailers make a loss, they cannot absorb it as easily as high net worth individuals or institutional investors.”
Regulated access for private investors?
The reduced risk appetite of retail investors compared to institutional investors is one of the reasons private investors need regulatory protection. But this does not necessarily mean that all retail investors are simple and that they should not have an option to use derivatives to hedge risk in their portfolios.
Haohan Xu, CEO and founder of Apifiny – a global provider of liquidity and settlement solutions – told Cointelegraph, “Derivatives do more than increase profits and losses. They also help investors hedge risk. Just because someone is simple does not mean that someone should be denied certain options in order to hedge risks. “
The risks in the crypto derivative market are similar to the risks of the currency markets, which are also heavily exploited. In these markets, governments and regulators around the world are intervening and enforcing maximum leverage limits on investors. According to Hao, the FCA could resort to such solutions rather than a blanket ban:
“It is incorrect to assume that all private investors are unaffected. Many of them have been in the crypto space for a long time and have a very good understanding of digital assets. Rather than an outright ban on crypto derivatives for retailers, adding an extra layer of gatekeeping to the crypto space, we believe education is key. “
Another issue raised by a blanket ban is that retail investors who persistently invest in these banned products should bypass this rule and invest in markets that are not protected by the FCA. Hao further stated, “These investors would be beyond the reach and protection of the FCA – which is clearly counterproductive.”
Xu alluded to another method of getting around the prohibition by using decentralized financial markets seen 30% growth since the start of this year: “While not preferred by regulators around the world, DeFi derivatives platforms are always an option for crypto derivatives as most of them are accessible from anywhere to anyone with just a wallet.”
It seems clear that there may be a better solution than an outright ban as it could potentially do more harm than good at this point, leading UK investors into unregulated markets or lowering Know Your Customer standards, adding more risk entails for retail. investors who do not have the same guarantees as institutional ones.
Retail education and regulatory involvement
Even after the announcement of the blanket ban on crypto derivatives and exchange-traded banknote products, Bitcoin’s price drop to $ 33,000 on January 11 prompted FCA to issue a public warning about the high risks that underlie all crypto assets and assets associated with it. The agency also has stated: “When consumers invest in these types of products, they must be willing to lose all their money.”
Hao explained how education would be a more effective method of protecting retail investors than outright bans: “Education is key, and it is crucial to allow investors to demonstrate their knowledge and skills before accessing complex products.” He further stated, “Unfortunately, if private investors are forced into exchanges with lower security standards for virtual storage of assets, they could ultimately be more harmed by this ban.”
The crypto community has contributed to these education initiatives by creating points and platforms for retail investors to be informed about the risks associated with trading leveraged derivatives markets. Several exchanges have educational and blogging sections on their website geared towards private investors to educate them on all these aspects. There are also exclusive blockchain and cryptocurrency educational platforms, such as Blockchain Education Network, which was started by students from the Massachusetts Institute of Technology and the University of Michigan.
It is also essential for the crypto community to work with governments and regulators to create frameworks that allow retail investors to navigate these markets with ease. Spiro: “The priorities of the regulators are to protect the financial ecosystem and consumers. Collaboration is the best way to calm regulatory issues while avoiding burdensome regulation. “
Due to the size and volumes of the UK retail market compared to the global crypto derivatives market, this ban is highly unlikely to have a significant impact on the accelerated growth of crypto derivatives that will continue into 2021. According to Hao:
“The targeted growth of derivatives is clear and will outperform the spot market for the foreseeable future. Exchanges have clients all over the world, and as interest in cryptocurrencies grows, the jurisdictions that are more open and understand how best to regulate them will eventually become the winners in this race. “